What is Forex?

Forex, short for "foreign exchange," is the global marketplace where currencies are traded. It is the largest and most liquid financial market in the world, with over $7.5 trillion traded daily.

Unlike stock markets, forex has no central exchange. Trading happens electronically over-the-counter (OTC) through a global network of banks, brokers, and financial institutions.

How It Works

When you trade forex, you are simultaneously buying one currency and selling another. Currencies are quoted in pairs — for example, EUR/USD (euro vs US dollar). The first currency is the base, the second is the quote.

If you buy EUR/USD, you expect the euro to strengthen against the dollar. If you sell EUR/USD, you expect the euro to weaken.

Why Trade Forex? - High liquidity — you can enter and exit positions instantly - 24-hour market — trade any time, Sunday evening through Friday night - Low barriers to entry — start with as little as $10 - Leverage — control large positions with a small amount of capital - Profit in rising or falling markets — go long or short

Key Terminology - Pip — the smallest price movement in a currency pair (usually 0.0001) - Spread — the difference between bid and ask price - Lot — a standardised trading size (1 lot = 100,000 units) - Leverage — borrowed capital that amplifies your trading size - Margin — the amount required to open a leveraged position

Forex in Ethiopia

For Ethiopian traders, forex offers access to global markets that are otherwise difficult to reach due to local currency controls. Most Ethiopian traders focus on major pairs like EUR/USD, GBP/USD, and XAU/USD (gold), which offer tight spreads and high liquidity.

Gold (XAU/USD) is particularly popular among Ethiopian traders because it correlates with global economic uncertainty and tends to have clearer technical patterns.

In the next lesson, we will explore the major currency pairs and which ones are best for beginners.