Forex Basics: How Currency Trading Works

What is forex?

Forex (foreign exchange) is the market where one currency is exchanged for another. It is the largest financial market in the world — around $7.5 trillion changes hands every day — and it runs 24 hours a day, five days a week across Sydney, Tokyo, London and New York. Unlike stocks there is no central exchange; banks, funds, corporations and retail traders deal through a network of liquidity providers, and your broker gives you a window into that network.

Currency pairs and quotes

Currencies are always traded in pairs. In EUR/USD the euro is the base currency and the dollar is the quote currency: a price of 1.0850 means one euro costs 1.0850 dollars. Buying EUR/USD means buying euros and selling dollars; you profit if the euro strengthens. Selling EUR/USD is the opposite. Pairs are grouped into majors (contain USD, most liquid), crosses (no USD, e.g. EUR/GBP) and exotics (one emerging-market currency, e.g. USD/TRY).

Every pair shows two prices: the bid (what you sell at) and the ask (what you buy at). See them live on the live prices page.

Pips and lots

A pip is the standard unit of price movement: 0.0001 on most pairs, 0.01 on JPY pairs. If EUR/USD rises from 1.0850 to 1.0870 it has moved 20 pips. A lot is the standard trade size — 100,000 units of the base currency. Mini lots are 10,000 units, micro lots 1,000. On a standard lot of EUR/USD one pip is worth $10; on a micro lot, $0.10. The pip calculator does the conversion for any pair.

Spread and costs

The spread is the gap between bid and ask, and it is the main cost of trading. EUR/USD typically trades at 0.1–1.0 pips at a good broker; exotics can be 20+ pips. Some brokers add a fixed commission per lot instead of widening the spread. Holding a position overnight also incurs (or earns) a swap — the interest-rate differential between the two currencies.

Leverage and margin

Leverage lets you control a position larger than your deposit: at 1:30 a $1,000 margin controls $30,000. Leverage magnifies both gains and losses in equal proportion — it is why forex can be profitable with small moves and why beginners blow up accounts. The margin is the deposit locked to hold the position; if losses eat into it your broker issues a margin call and eventually closes trades. Use the margin calculator and read the risk-management guide before trading with leverage.

Anatomy of a trade

Suppose you think the euro will rise. EUR/USD is 1.0850 / 1.0851. You buy one mini lot (10,000 EUR) at 1.0851. You set a stop-loss at 1.0821 (30 pips, $30 risk) and a take-profit at 1.0911 (60 pips, $60 target) — a 2:1 reward-to-risk. If the price reaches 1.0911 you earn $60 minus the 1-pip spread ($1). If it hits 1.0821 you lose $30. The P&L calculator runs this arithmetic for any trade.

Order types

• Market order — execute now at the current price.
• Limit order — buy below / sell above the current price, waiting for a pullback to a level.
• Stop order — buy above / sell below the current price, to trade a breakout.
• Stop-loss — closes a losing trade at a set price. Never trade without one.
• Take-profit — closes a winning trade at your target.