Chapter 1: What Is Forex and Why Trade It?

Every day, trillions of dollars change hands in a market most people never think about. While you sleep, while you work, while you go about your day, currencies are bought and sold around the clock in what is arguably the largest financial market on the planet. This is the foreign exchange market, and people were exchanging money long before stock exchanges existed in their modern form.

If you have exchanged currency while traveling, you have used it. The rate you were given at the airport kiosk or the bank was set by the same forces that professional traders analyze every day. The difference is that professionals have learned to read those forces and position themselves accordingly.

This chapter covers what currencies are, why they move, and how the market became what it is today. It also asks a harder question: whether forex trading is right for you.

What Forex Means

Forex is short for "foreign exchange," often written FX. Both terms mean the global marketplace in which currencies are traded against each other, and "against each other" is meant literally. You cannot simply buy dollars in forex; you buy them with something else, such as euros, pounds or yen. Every transaction involves two currencies at once. That idea, the currency pair, underlies everything that follows, and Chapter 2 treats it in depth. For now it is enough to say that forex trading is speculation on whether one currency will strengthen or weaken against another. If you believe the euro will rise against the US dollar, you buy euros with dollars; if you are right, you can later sell those euros back for more dollars than you started with.

Currencies are a different kind of asset from stocks or commodities. A share is a small piece of a business, and gold is a physical commodity with industrial uses. A currency is a claim on the economic output of a nation. The value of the US dollar reflects, broadly, the strength of the American economy, the stability of its political system and the policies of its central bank, and buying dollars expresses confidence in those things relative to whatever currency you sell. This is why currencies respond to different news from stocks. A stock may rise on strong earnings; a currency may rise because the central bank raised interest rates, because political uncertainty eased, or because commodity prices moved in that nation's favor.

Why currencies have different values

Beginners often ask why one British pound is worth more than one US dollar while one US dollar is worth over 100 Japanese yen. Does Britain have a stronger economy than America, and America a stronger one than Japan? Not at all. The nominal value of a currency says almost nothing about economic strength. The yen was pegged at 360 to the dollar after the war, and since the 1990s it has mostly traded between about 75 and 160, while the pound has historically traded at higher nominal values. What matters in trading is the change in value. If EUR/USD moves from 1.0500 to 1.0600, the euro has strengthened by roughly one percent against the dollar, and whether the number in front of you is 1.05 or 105 makes no difference to that percentage. You profit from the movement, not from holding the currency with the larger face value.

The forces that do move currencies are familiar from economics. Higher interest rates attract foreign capital in search of better returns. Lower inflation preserves purchasing power and supports a currency's value. Strong growth in GDP attracts investment, while political uncertainty drives capital away. A country that exports more than it imports creates demand for its currency. Above all of these sits sentiment, since perception often moves faster than the fundamentals.

This book concentrates on technical analysis, the study of price charts and patterns. You should still keep a background understanding of why currencies move. Even if you never trade the news, knowing that a central bank announcement is due can keep you out of the sudden volatility that follows it.

A Brief History of Currency Trading

Where forex came from explains much of how it works today. Exchanging money is ancient, but the modern market is surprisingly young: it was born from decisions made in the early 1970s.

For much of modern history the major currencies were tied to gold. A government promised to exchange its paper money for a fixed amount of gold on demand, which gave stability at the cost of rigidity, because a country could not easily adjust its money supply to economic conditions. The gold standard worked reasonably well in the late 1800s and early 1900s, then collapsed under the pressure of World War I. Governments needed to print money to pay for the war, which was impossible if every note had to be backed by gold, and the attempts to return to gold after the war created more problems than they solved.

In 1944, as World War II was ending, representatives of 44 countries met at Bretton Woods, New Hampshire, to design a new monetary system. The US dollar was pegged to gold at $35 an ounce, and the other major currencies were pegged to the dollar at fixed rates. The arrangement made the dollar the world's reserve currency, a status it largely keeps today. Central banks held dollars as reserves instead of, or alongside, gold, and international trade was priced in dollars. The American economy, undamaged by the war unlike those of Europe and Japan, could support the system. It lasted nearly three decades, steadied international trade and helped rebuild economies ruined by war. Cracks appeared in the 1960s, as American spending on the Vietnam War and on domestic programs created inflation and foreign governments began to doubt that the United States could exchange all those dollars for gold at the promised rate.

In August 1971 President Nixon announced that the United States would no longer convert dollars into gold. The "Nixon Shock" effectively ended Bretton Woods, and by 1973 the major currencies were floating freely against each other, their values set by the market rather than by government decree. This is the birth of the forex market as we know it. For the first time traders could speculate on currency movements without fixed rates limiting the range of motion, and banks, corporations and eventually individuals began to take part.

By the mid-1980s the dollar had strengthened so far that American exporters were suffering. In 1985 the finance ministers of France, West Germany, Japan, the United Kingdom and the United States met at the Plaza Hotel in New York and agreed to coordinate intervention to weaken it. The Plaza Accord showed that governments could still move currency markets, and also that fighting a sustained trend was expensive. It was a formative event for many veteran traders and is still studied as an example of coordinated intervention.

For decades forex remained the domain of banks and large institutions, and individuals had no practical way in. That changed in the 1990s with electronic trading platforms and the internet. By the early 2000s retail brokers offered online platforms on which anyone with a computer and a few hundred dollars could trade currencies, and leverage let small deposits control large positions. A market once reserved for professionals was suddenly open to individuals. The opening brought opportunity and risk together: retail traders gained access to the same markets as the banks, often without the same knowledge, discipline or resources. The record of retail trading results, discussed later in this chapter, is not encouraging.

The Forex Market Today

The forex market trades over $9.5 trillion a day. That figure comes from the Bank for International Settlements Triennial Survey of April 2025, the standard source everyone quotes. Note the word triennial: the survey is taken once every three years, so treat the figure as the scale of the market rather than today's number, and check the current survey if you need it precisely. It is the most recent survey at the time of writing; the next is due in 2028, and the BIS publishes the results at bis.org. The table below sets it beside the stock markets.