Forex (foreign exchange, or FX) is the global market where currencies are bought and sold. At its simplest, every forex trade involves simultaneously buying one currency and selling another. That means you are always trading a pair — for example, EUR/USD — and you profit if the price moves in the direction you anticipated. Below I explain how the market operates, how trades are priced and executed, the tools traders use, and practical steps to get started. Trading carries risk; this article is educational and not personalised advice.
The market and who participates
The forex market is decentralized and runs across time zones. Trading flows move from Asia to Europe to North America during the 24-hour period that the market is open each weekday. Big banks and central banks account for most volume, while hedge funds, corporations and retail traders make up the remainder. Because of this global reach, liquidity is high in the most popular pairs, but liquidity drops for less common combinations and at quieter hours.
Imagine someone at an airport currency desk exchanging dollars for euros — that is a tiny, simple version of forex. Professional trading happens electronically between banks and trading venues, but the principle is the same: one currency is exchanged for another at a quoted rate.
Currency pairs and how prices are quoted
Currencies are quoted in pairs, with the base currency listed first and the quote currency second. In EUR/USD, EUR is the base and USD the quote. A price of 1.1200 means 1 euro buys 1.12 US dollars.
Each quote has two prices: the bid (what buyers will pay) and the ask (what sellers will accept). The difference between them is the spread. When you open a trade you pay the ask if you buy, or receive the bid if you sell; a small immediate cost exists because of that spread.
Prices are usually expressed to four or five decimal places. A pip is the standard unit of price movement: for most pairs one pip equals the fourth decimal place (0.0001). For USD/JPY a pip is typically the second decimal (0.01) because the yen is priced differently.
Lots, pip value and position sizing (with examples)
Forex is traded in contract sizes called lots. A standard lot equals 100,000 units of the base currency. Many brokers offer smaller sizes: a mini lot is 10,000, and a micro lot is 1,000. Pip value depends on the pair, lot size and the account currency.
For example, if you buy one standard lot of EUR/USD, one pip movement is worth about $10 (0.0001 × 100,000). With a mini lot each pip is about $1, and with a micro lot about $0.10. So a 25‑pip move on a mini lot would be roughly $25. Understanding pip value helps you size positions so your potential loss matches the risk you’re prepared to take.
Leverage and margin — use with care
Leverage allows you to control a large position with a relatively small amount of capital. A leverage ratio of 50:1 means that with $1,000 of margin you can control $50,000 in currency. Leverage increases both potential profit and potential loss. If the market moves against you, losses are calculated on the full position size, not just the margin you provided, and you can lose more than your deposit unless the broker’s protections prevent that.
Margin is the portion of your account set aside to keep a leveraged position open. Brokers monitor margin levels and will issue margin calls or close positions automatically if your equity falls below required levels. Always know the margin requirements and test position sizes with a calculator before trading live.
How a trade is executed
Retail traders place orders through brokers or trading platforms. Most retail forex is “spot” trading — you are taking a position on the exchange rate, not physically exchanging cash. There are three common order types you will use: market orders (execute immediately at current prices), limit orders (execute at a specified price or better), and stop orders (used to limit loss or enter after a breakout). You can also set take-profit levels to close a trade automatically at a target price.
Execution can be instant, but during fast-moving news events you can experience slippage — executions at prices different from the ones you requested. Spreads can widen during low liquidity or high volatility, which increases trading costs at those times.
What moves currency prices
Currency values shift for the usual economic and political reasons: interest rate differences, inflation figures, employment data, GDP, trade balances, central bank communication and geopolitical events. A simple example: if the eurozone raises interest rates while US rates are unchanged, holding euros becomes more attractive and EUR/USD may rise as traders buy euros and sell dollars.
Traders use two broad approaches to analyse the market. Fundamental analysis studies economic indicators and policy decisions to form a directional view. Technical analysis looks at price charts, patterns, trend lines and indicators to time entries and exits. Many traders combine both: a fundamental reason to favour one currency plus technical levels to decide where to enter.
Common trading strategies explained in plain terms
Traders use different styles depending on time available, temperament, and goals. A trend trader looks for pairs showing a clear, sustained move and trades with that direction. A range trader buys near support and sells near resistance when price is oscillating. Breakout traders wait for price to move beyond a defined area and then enter to capture the new trend. Scalpers take many small trades to catch tiny moves, while swing traders hold for days to capture medium-term swings. Each approach requires a clear plan for risk and position sizing.
Practical steps to start trading
Before risking real money, open a demo account with a regulated broker and practise. Learn the basic building blocks: how pairs work, what pips and lots are, how to place and modify orders, and how to set a stop-loss. Build a simple trading plan that defines the pair(s) you will trade, timeframes, entry and exit rules, and the maximum percentage of your account you will risk per trade (many beginners use 1% or less).
Start small on a live account when you are ready, and treat trading like a business: track trades in a journal, review mistakes, and continually refine your approach. Use tools such as an economic calendar to know when major data may move the market.
Risks and caveats
Forex trading carries several specific risks you should understand. Leverage magnifies both gains and losses; it can wipe out an account quickly if used without strict risk controls. Liquidity varies between pairs and across hours — wider spreads and slippage happen when liquidity dries up, especially for exotic pairs or during major news. Counterparty risk exists if you trade with an unregulated or weakly capitalised broker; choose providers with solid regulation and transparent execution. Overnight positions can incur financing or swap charges that affect profitability over time. News and geopolitical events can cause sudden, unpredictable price moves that hit stop orders at worse-than-expected prices. Psychological risk is also real: emotional decision‑making, revenge trading after losses, or overtrading can erode capital faster than any market risk. Because of these factors, many traders emphasise strict position sizing, a written trading plan, use of stop-loss orders, and practising on demo accounts before trading with significant capital. Trading carries risk; this is not personalised advice.
Key takeaways
- Forex is the market for trading pairs of currencies; you profit if the rate moves in the direction you predicted, but losses are possible.
- Trades are quoted as bid/ask prices; pip, lot size and leverage determine how much you gain or lose per move.
- Use a demo account, learn position sizing and risk management, and start small; set stop-loss and take-profit levels and keep a trading journal.
- Leverage, liquidity, broker counterparty and news events can magnify losses — trading carries risk and is not suitable for everyone.
References
- https://www.home.saxo/learn/guides/forex/how-to-start-forex-trading
- https://www.babypips.com/learn/forex/buying-selling-currency-pairs
- https://www.youtube.com/watch?v=GWelSpdKwCw
- https://www.babypips.com/learn/forex/what-is-forex
- https://www.schwab.com/learn/story/ways-to-trade-currency-pairs
- https://www.tastyfx.com/learn/how-to-trade-forex/
- https://www.investopedia.com/financial-edge/0412/the-basics-of-currency-trading.aspx
- https://www.schwab.com/learn/story/foreign-exchange-forex-trading-beginners