The short answer
- Forex means buying one currency while selling another; EUR/USD at 1.0850 means one euro costs 1.0850 dollars.
- Moves are measured in pips (0.0001 on most pairs) and sizes in lots (100,000 units for a standard lot).
- Almost all retail forex is leveraged, which is why regulators cap it at 30:1 on major pairs in the UK, EU and Australia.
How does forex trading work, in short?
How forex trading works comes down to one idea: you exchange one currency for another, hoping the rate moves in your favour before you exchange back.
Every forex price is a pair. The first currency is the base, the one you are buying or selling. The second is the quote, the one you pay or receive. If EUR/USD is 1.0850, one euro costs 1.0850 US dollars. Buying the pair means you expect the euro to strengthen against the dollar; selling it means you expect the opposite.
If you have used a crypto platform, the layout is familiar: BTC/USDT is priced the same way, with USDT playing the role of the quote currency. What changes is the size of the moves, the use of leverage and the rules around both.
What are the bid, the ask and the spread?
The bid is what you get if you sell, the ask is what you pay if you buy, and the gap between them is the spread, your first cost on every trade.
A quote such as 1.08500 / 1.08512 shows both sides. Buy, and you pay 1.08512. Sell straight away, and you receive 1.08500. That 0.00012 gap, 1.2 pips, is taken by the provider or the market makers behind it. It is usually tightest on heavily traded pairs such as EUR/USD and USD/JPY during the busiest hours, and widest on less common pairs, at night and around big news. The trading fees guide shows how the spread combines with commissions and overnight charges.
What is a pip, and what is a lot?
A pip is the standard unit of price movement: 0.0001 on most pairs, 0.01 on pairs quoted in Japanese yen. A lot is the standard trade size: 100,000 units of the base currency.
Smaller sizes exist: a mini lot is 10,000 units and a micro lot 1,000. On any pair quoted in US dollars, such as EUR/USD or GBP/USD, one pip on one standard lot is worth $10, on a mini lot $1 and on a micro lot 10 cents.
For yen pairs, one pip on a standard lot is 1,000 yen, and its dollar value depends on the rate. With USD/JPY at 150.00, that is 1,000 ÷ 150 ≈ $6.67. The pip calculator does the conversion for any pair.
Why is forex almost always traded with leverage?
Because currencies usually move less than one percent in a day, providers let you control a large position with a small deposit, called margin. That multiplies gains and losses alike.
At 30:1 leverage, a position worth $108,500, one standard lot of EUR/USD at 1.0850, needs about $3,616.67 of margin. The trade is still worth $108,500, so a 1% move against you costs about $1,085, nearly a third of the margin, in a single move that is not unusual for a volatile week.
Regulators know this, so they limit it. Retail clients in the UK and EU can use at most 30:1 on major pairs and 20:1 on other pairs, with positions closed automatically if the account's margin level falls to 50%. Australia applies similar caps, and in the US the retail limit is 50:1 on majors. Retail clients in the UK and EU also have negative balance protection, so they cannot lose more than the money in their account. Firms outside these regimes may advertise 500:1 or more, which is a reason for caution rather than a feature. Try the margin calculator and the position size calculator to see the numbers for yourself.
When is the forex market open?
From Sunday 17:00 to Friday 17:00 New York time, around the clock in between.
The trading day passes from Sydney and Tokyo to London and then New York. Activity, and usually the tightest spreads, peak when London and New York overlap. Each day at 17:00 New York time, open positions roll over to the next day and are charged or credited an overnight fee, the swap. The Wednesday rollover is usually charged three times to cover the weekend. The forex trading sessions guide goes through the day hour by hour.
What makes exchange rates move?
- Interest rates. When a central bank raises rates, or markets expect it to, its currency often strengthens, because holding it earns more.
- Economic releases. Inflation, jobs and growth figures arrive at scheduled times and can move a pair dozens of pips in seconds.
- Risk mood. In a sell-off, money tends to seek the US dollar, Japanese yen and Swiss franc; in calm periods it drifts to higher-yielding currencies.
- Trade and capital flows. Companies paying for imports and investors buying foreign assets all need currency, day in and day out.
None of these gives a reliable forecast. They explain why a rate moved more easily than they predict where it goes next.
Which currency pairs should a beginner know first?
The majors, all paired with the US dollar, then the main crosses. Exotic pairs come last, if at all.
The majors are EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD and NZD/USD. They carry most of the market's volume, so spreads are usually tight and prices move smoothly. Crosses pair two major currencies without the dollar, such as EUR/GBP or EUR/JPY; they are active but often slightly more expensive to trade. Exotics pair a major currency with that of a smaller or emerging economy. Their spreads can be many times wider, overnight charges higher, and sudden moves larger, which is why UK and EU rules allow less leverage on non-major pairs.
Is trading forex the same as changing money for a trip?
The rate is the same underlying market, but a holiday exchange is a one-off conversion, while trading is buying and selling to profit from the change.
If you are simply changing cash, the best foreign exchange rate you can hope for sits close to the mid-market rate, halfway between bid and ask. Bureaus, card providers and banks add a margin. As an illustration, if the mid rate for GBP/USD is 1.2500 and a bureau offers 1.2125, that is 3% worse: £1,000 buys $1,212.50 instead of $1,250, a hidden cost of $37.50. The same logic, comparing the price you get with the mid-market price, is how to judge a trading provider's spread.
Who is on the other side of your trade?
Retail forex rarely touches the interbank market directly. Most people trade through a provider that either takes the other side itself (a market maker) or passes orders on to larger liquidity providers. In the UK, EU and Australia, what you usually hold is a CFD or rolling spot contract: an agreement with the provider that pays out the price change, not the currency itself. That makes the provider's regulation, and how it holds client money, central to your risk. Our checklist on how to choose a broker explains what to look for.
What is a sensible first step?
Learn to read a quote, calculate a pip and size a position before any money is involved. Work out, for each idea, where you would admit you were wrong, how many pips away that is, and what that costs at your chosen size. If the loss at your stop is more than you would calmly accept, the position is too big. The glossary covers any terms that are still unclear.
Quick follow-ups
How much money do I need to start trading forex?
Providers set their own minimums, and some accept very small deposits. The more useful question is how much you can afford to lose: size every position so a loss at your stop is a small share of that amount.
Can you lose more than you deposit in forex?
Retail clients in the UK and EU have negative balance protection, so their losses are limited to the money in the account. Elsewhere, and for professional clients, a fast move can leave a negative balance you owe the provider.
Why do forex prices have so many decimal places?
Because typical moves are small. Most pairs are quoted to four decimals plus a fractional fifth, the pipette, so traders can price the tiny changes that matter once positions are large.
Sources
- UK Financial Conduct Authority, CFD rules for retail clients
- European Securities and Markets Authority, product intervention measures on CFDs
- US Commodity Futures Trading Commission and NFA, retail forex leverage limits