A practical introduction to the world’s largest financial market, and how currency trading works.
Forex, short for foreign exchange, is the global market where currencies are bought and sold. It is the largest financial market in the world, and it operates around the clock during the trading week as sessions open in Sydney, Tokyo, London and New York.
Every forex trade involves two currencies at once: you buy one and sell the other.
Currencies are quoted in pairs, such as EUR/USD. The first currency is the base and the second is the quote. If EUR/USD is 1.0850, one euro costs 1.0850 US dollars.
A pip is the standard unit for measuring price changes, usually the fourth decimal place. A lot is the standard trade size, and traders often use smaller fractions of a lot.
Leverage lets you control a larger position with a smaller deposit. It magnifies profits and losses equally, so it must be used carefully.
Every forex price has a buy price and a sell price. The gap between them is the spread, and it is your main cost. Some accounts also charge a commission, and positions held overnight may incur a swap.
Forex trades online 24 hours a day, five days a week. Activity and spreads vary through the day, with the busiest periods when major sessions overlap, such as London and New York.
You expect the euro to strengthen against the dollar and buy EUR/USD at 1.0850. If the price rises to 1.0900, that is a 50-pip move in your favour. If it falls to 1.0800, it is a 50-pip move against you.
The profit or loss depends on your position size, which is why sizing matters as much as direction.
Currency prices can move quickly, especially around economic news. Leverage can turn small moves into large losses, and you can lose more than your original deposit on leveraged products. Only trade with money you can afford to lose.
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