What is forex?

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Fact checked by
Adam N.
Updated
Dec 2023
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If you ever wondered what your neighbor Joe meant when he said he was into forex trading, you are in the right place. Join us on this crash course of what forex means and we'll guide you through the basics and more.

The world of finance is awash with technical terms, abbreviations and acronyms. Case in point: forex, which is short for foreign exchange. When people talk about forex, they refer to the simultaneous buying and selling of currencies on the international market, also known as the forex market.

THE ESSENCE:

  • Forex means the simultaneous buying and selling of currencies on the international market
  • Currency trading and money exchange are different concepts
  • You will need at least a couple of years to become proficient in forex trading
  • Open a demo account at a forex broker to practice risk free
  • Forex is not a get rich fast scheme, be prepared for some losses
  • Don't trade forex without proper risk management
  • Make sure the broker you choose is reputable and regulated
  • Be aware that forex traders are often the target of scammers
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Is forex trading for you?

Forex trading is a tough nut to crack. Before we go into the hows and whys, let's clarify what it means in the first place. When you trade forex, you are buying one currency and selling the other at the same time in the hope of making a profit. You always trade a currency pair, never a single currency.

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In a long EUR/USD trade you will buy euros and sell dollars and you will only make a profit if the euro appreciates against the dollar. If the dollar appreciates against the euro, your bet is wrong and you will make a loss.

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Is it difficult to learn forex trading?

The short answer is yes. Forex trading is a complex form of speculation that involves heaps of technical analysis and requires a solid understanding of complex economic and financial principles as well as risk management. Successful forex traders need to be able to interpret market trends, macroeconomic developments, central bank actions and announcements, and more.

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What can you realistically achieve with forex trading?

You may hear people bragging about the vast fortunes they made trading forex. Don't take these stories at face value. Statistics show that more than 80% of novice forex traders lose their entire invested money in the first 6-12 months of trading.

Part of the reason is many people see forex as a get-rich-quick scheme.

It most certainly is not and the forex market can be unforgiving. You may be able to make handsome profits here and there by taking high risks, but your luck will eventually run out.

A common mistake beginners commit is to underestimate the complexity of forex trading. It is never a good idea to make light of the market's power and its varying levels of volatility, regardless of whether you are trading part-time, full-time, or every once in a while. Try to learn the ins and outs of forex, and appreciate the potentially complex nature of what you are doing.

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Is stock trading better than forex trading?

There is no good answer to whether one is better than the other, but one thing is for sure: they are definitely different. Generally speaking, forex is the riskier option but it definitely holds a good potential for short-term wins.

One of the greatest risk factors when trading forex is the improper use of leverage.

This is a central concept in forex trading and you should not venture into the forex realm before you have a thorough understanding of it. When you trade on leverage, you are trading with money borrowed from your broker.

Why would you do this instead of just investing your money?

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How does forex trading work?

Let's assume your mind is set on giving forex trading a try but you want to take things slowly so you open a demo account to practice. Well done, you made a smart decision. You will need to become acquainted with a few basic concepts in order to understand what you see in your demo account.

When you go to the trading platform in your demo account, you will see something like this.

This is where you stand in your journey to your first trade

It may look frightening at first glance, but we are here to help you make sense of it. We will now explain a few basic terms which are quite simply a must know for everyone wanting to trade currencies.

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What is the best risk management in forex?

Ignoring risk management is one of the biggest mistakes a rookie forex trader can make. Many people get enthusiastic at the start of their forex journey and hit the buy or sell button only to wipe out their account after a few trades. If you want to stay in the game in the long term, you will need to set up your own rules about how you treat risk and how you manage your losses (you will have losses). Risk management will be a building block of your trading strategy.

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Is there a 100% winning strategy in forex?

There is no foolproof forex trading strategy, don't believe anyone who says otherwise. Nevertheless, trading without one is not a smart move. A successful currency trading strategy needs to be uniquely tailored to you and it must reflect your:

  • risk profile
  • personality
  • emotions
  • mental state
  • motivation
  • daily schedule
  • and trading time.
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What does a forex broker do?

A forex broker is a financial services company that accepts retail clients and provides a trading platform for buying and selling currencies.

Some brokers specialize in forex but some of the biggest names in the industry such as Interactive Brokers and Saxo Bank offer a whole range of other assets in addition to currencies.

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Types of forex brokers

You need to understand how brokerages are categorized in order to make a wise broker choice. We will try to keep this as simple as possible. There are two types of forex brokers based on how they execute orders:

  • Dealing desk brokers - you interact directly with the broker and not the liquidity providers/interbank market. These are also called market makers.
  • Non-dealing desk brokers - your orders are routed directly to the liquidity providers/interbank market and the broker only passes your trades through.

We looked at the most popular forex brokers in the world to see which are market makers. Click the broker names below to see whether the broker is a market maker and what this means for you as a trader.

To make matters slightly more complex, there are different subcategories: the main broker types within the non-dealing desk category are ECN (electronic communication network) and STP (straight through processing) brokers as well as their various hybrids. Note how abbreviations abound in forex? Within the dealing desk group, the main type of broker is called market maker.

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What is the best platform to use for forex trading?

There is no single, universally designated best trading platform for forex because each trader has their own preferences and style. We can say, however, that the

MetaTrader platforms are definitely the most popular interfaces used for trading in the forex universe.

Why platforms?

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How do I avoid scams in forex trading?

The question should be on the top of your mind when embarking on your currency trading journey. Even though regulators are stepping up to the plate and forex scams are not as pervasive as they used to be, unfortunately problems still exist.

As a general word of advice, be suspicious if you're offered forex trading services that promise massive gains in a short period of time. Trading forex carries considerable risks, and there is no guarantee your trades will always be profitable.

Promises of exorbitant gains or guaranteed profit are almost always a red flag.

Never deposit any funds without due diligence of the person/organization you are dealing with. One of the most common types of forex scam relies on not allowing people to withdraw the funds they had deposited earlier. If you decide to send some money, first use a small amount to deposit and withdraw as a test.

To be on the safe side, always remember the universally accepted truth that forex trading is not a one-way ticket to making big money in a short period of time.

Check out the safety profile of the top forex brokers and see why our analysts find them trustworthy:

Check your broker in BrokerChooser Scam Broker Shield to make sure you are safe.

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Further reading

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology.

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Edith Balázs
Author of this article
I bring 20+ years of experience as a correspondent having worked for Bloomberg, Dow Jones and The Wall Street Journal covering macroeconomics, stock, currency and fixed-income markets. I hold a Master's degree in American Studies and Journalism.
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