Forex

The basics, the advantages and the risks.

What is forex?

US hundred-dollar bills fanned out in close-up

Forex is the market where currencies are traded against each other.

Forex is short for foreign exchange.

An exchange rate is the relative price of one currency in terms of another.

How does forex work?

Everyone needs currencies
Travelers, shoppers who order from abroad, and businesses that buy or sell abroad all deal in other currencies.
Traders
Currency traders buy and sell currencies based on how they expect exchange rates to change.
Central banks
Some central banks buy and sell currency to keep their own currency close to a target.
Dealers, not one exchange
Unless you trade forex futures or options on a regulated exchange, you trade over-the-counter, against a dealer. When you buy, the dealer sells; when you sell, the dealer buys.
Supply and demand
The major currencies, such as the US dollar, the euro, the Japanese yen and the pound sterling, float: their rates are generally set by supply and demand.

A British five-pound note rolled into a curl, close up

What do the key words mean?

Currency pair: Two currencies quoted together, such as AUD/USD. That rate tells you how many US dollars you get for each Australian dollar.
Floating and pegged: A floating currency’s rate is set mainly by the market. A pegged currency is tied to another currency, such as the US dollar.
Terms of trade: How the prices a country gets for its exports compare with the prices it pays for its imports.
Over-the-counter (OTC): Trading directly with a dealer, not in an open market.
Margin: The deposit a dealer requires to open and keep a position.
Leverage: Controlling a large position with a small deposit. It makes both gains and losses bigger.

What moves exchange rates?

The Reserve Bank of Australia names these drivers for its own currency:

Interest rate differences between countries.
Commodity prices and the terms of trade.
Prices and inflation, over time.
Day to day, changes in risk sentiment and speculation.

For example, all else being equal, a rise in Australian interest rates contributes to a higher Australian dollar.

What are the advantages?

The Foreign Exchange Committee, sponsored by the New York Fed, calls the FX market the largest and most liquid marketplace in the global economy.

The trading week

Opens: Monday, 5.00 am, Sydney time

Closes: Friday, 5.00 pm, New York time

Normal trading, as described by the Australian Foreign Exchange Committee. Undated page, read 31 October 2026.

A 50-euro banknote in close-up, in warm light

What are the risks?

The forex market is volatile and carries substantial risks. It is not the place to put any money that you cannot afford to lose, such as retirement funds, as you can lose most or all of it very quickly.
US CFTC

$2,000

$100,000

2 percent

A 2 percent margin requirement means you could open a $100,000 position with only $2,000 in your account.

A 2 percent move against that position equals the whole $2,000. You may also be liable for additional losses beyond your initial deposit.

Source: US CFTC, 2 August 2022. The 2 percent move is arithmetic.

At registered US forex dealers, about two-thirds of customers lost money from Q2 2021 through Q1 2022.
US CFTC

How can ETTFOS help?

Successful traders follow a proven system.

One framework, taught since 1997.

A disciplined, rules-based approach to trading, with risk management at the heart of every decision.
Clear rules for entries, exits and risk.
Entry, target and stop, decided before the trade.

The strategies apply to every time frame, from day trading to the long term, without frantic buying and selling.

ETTFOS courses cover the markets in different depth.

Taught live online or in person, in small, interactive groups.

Next step

Explore the program

ETTFOS is not an investment advisory service or a broker-dealer, and it does not tell anyone what to buy or sell.

Forex

What is forex?

How does forex work?

Everyone needs currencies

Traders

Central banks

Dealers, not one exchange

Supply and demand