Forex trading is the buying of one currency while selling another, with the aim of profiting from changes in their exchange rate. The foreign exchange market, usually shortened to forex or FX, is the largest financial market in the world. Banks, businesses, governments, funds and individual traders all take part, and it runs around the clock on weekdays. This guide explains how the market works, the key terms you will see on any trading platform, and what to understand before you place your first trade.
How the forex market works
Unlike a stock exchange, the forex market has no single central location. It is an over-the-counter (OTC) market: trades happen electronically between participants connected through banks, liquidity providers and brokers. Because major financial centres open and close at different times, trading passes from Sydney to Tokyo to London to New York, which is why the market is open 24 hours a day from Monday morning in Asia to Friday evening in New York.
People trade currencies for many reasons. A company may need euros to pay a supplier, a traveller exchanges money for a holiday, a central bank manages its reserves, and speculators try to profit from price movements. Retail traders like you are usually speculating on whether one currency will rise or fall against another.
Currency pairs explained
Currencies always trade in pairs, such as EUR/USD. The first currency is the base currency and the second is the quote currency. The price tells you how much of the quote currency one unit of the base currency costs. If EUR/USD is 1.0850, one euro costs 1.0850 US dollars.
- Buying (going long) EUR/USD means you expect the euro to strengthen against the dollar.
- Selling (going short) EUR/USD means you expect the euro to weaken against the dollar.
Pairs are commonly grouped into three categories:
- Majors: pairs that include the US dollar and another large economy's currency, such as EUR/USD, GBP/USD, USD/JPY and USD/CHF. They are usually the most heavily traded.
- Minors (crosses): pairs of major currencies without the US dollar, such as EUR/GBP or AUD/JPY.
- Exotics: a major currency paired with one from a smaller or emerging economy, such as USD/TRY. These tend to be less liquid and can move sharply.
Key terms every beginner should know
Bid, ask and spread
Every pair has two prices. The bid is the price at which you can sell, and the ask is the price at which you can buy. The difference between them is the spread, which is one of the main costs of trading. Our guide to forex spreads covers this in detail.
Pips
A pip is the standard unit for measuring price movement. For most pairs it is the fourth decimal place (0.0001), so a move in EUR/USD from 1.0850 to 1.0851 is one pip. For pairs involving the Japanese yen, a pip is the second decimal place (0.01).
Lots
Trade size is measured in lots. A standard lot is 100,000 units of the base currency, a mini lot is 10,000 units and a micro lot is 1,000 units. Smaller lot sizes let you control how much each pip of movement is worth to you.
Leverage and margin
Leverage lets you open a position larger than the money in your account. With 1:50 leverage, for example, $1,000 of margin controls a $50,000 position. Leverage magnifies both gains and losses, so a small price move against you can wipe out a large share of your account. Read how leverage and margin work before trading with it.
A simple example of a forex trade
Suppose EUR/USD is quoted at 1.0850/1.0851 and you believe the euro will rise. You buy one mini lot (10,000 euros) at the ask price of 1.0851. For a mini lot on EUR/USD, each pip is worth roughly $1.
- If the price rises to 1.0881 and you sell at the bid, you gain about 30 pips, or roughly $30, before any other costs.
- If the price falls to 1.0821 and you close the trade, you lose about 30 pips, or roughly $30.
The same logic applies in reverse when you sell first. The key point is that your profit or loss depends on the size of the position and how far the price moves, not on how much money is in your account.
What moves currency prices?
Exchange rates respond to anything that changes the supply of or demand for a currency. The main drivers include:
- Interest rates: higher rates can attract capital and support a currency, so central bank decisions are closely watched.
- Economic data: employment reports, inflation figures, GDP and retail sales can all move markets.
- Politics and geopolitics: elections, trade disputes and conflicts can increase uncertainty.
- Market sentiment: in times of stress, traders often move into currencies seen as safe havens.
When can you trade?
The market is open 24 hours a day on weekdays, but activity is not constant. Liquidity is usually highest when the London and New York sessions overlap, and quieter late in the US afternoon. See our guide to the best times to trade forex for session hours.
How retail traders access the market
Individual traders reach the forex market through a broker, which provides a trading platform and routes orders to the market. Brokers work in different ways. An ECN broker passes orders to a network of liquidity providers rather than taking the other side of the trade. Clarity FX, for example, is an ECN broker that offers forex and crypto pairs on the TradeLocker platform. You can learn more in What is an ECN broker? and What is TradeLocker?
Is forex trading right for you?
Forex can be accessible: you can start with small positions and practise on a demo account. But it is also risky. Many retail traders lose money, particularly when they use high leverage, trade without a plan or let emotions drive decisions. Before trading with real money, it helps to:
- Learn the basics covered in this guide and practise on a demo account.
- Only trade money you can afford to lose.
- Use a clear plan and a consistent risk management approach.
- Choose a broker you understand and trust.
If you want to go further, our step-by-step guide on how to start forex trading walks through the practical setup.
Trading forex and crypto on leverage carries a high risk of loss and may not be suitable for all investors. This article is educational and not financial advice. Read our risk disclosure.