Forex trading—short for foreign exchange trading—is the activity of buying one currency while selling another. It is the marketplace where banks, companies, governments and individual traders exchange currencies for commerce, investment and speculation. Because currencies are the medium for almost all cross-border trade and finance, the foreign exchange market is extremely large and liquid: transactions measured in trillions of dollars occur every day. For a retail trader, forex trading usually means taking positions on currency pairs to try to profit from changes in exchange rates. Trading carries risk; this article is for general education and is not personalised financial advice.
The basics: currency pairs and what you actually buy
Every forex price is quoted as a pair, like EUR/USD or GBP/JPY. The first currency in the pair is the base currency and the second is the quote (or counter) currency. The quoted price shows how much of the quote currency is needed to buy one unit of the base currency. For example, if EUR/USD is 1.10, one euro buys 1.10 US dollars.
When you place a trade you are simultaneously buying one currency and selling the other. If you think the euro will strengthen against the dollar you buy EUR/USD (go long); if you expect the euro to weaken you sell EUR/USD (go short). Retail trading platforms let you take either side of the trade, so profit can come from both rising and falling prices.
How forex trading actually works
Unlike stocks, which are traded on central exchanges, most forex trading happens over the counter (OTC) through a network of banks, brokers and electronic platforms. That decentralised structure is one reason the market is open nearly 24 hours a day during weekdays: trading flows from Asia to Europe to North America as the global trading day progresses.
Retail traders access the market through brokers. A broker provides a trading platform, displays bid and ask prices, and executes orders. Brokers make money in different ways: by charging a commission per trade, by widening the spread (the difference between buy and sell prices), or a combination of both. When you place an order you can use market orders (execute immediately at current prices) or limit/stop orders (execute only if price reaches levels you specify).
Key terms you’ll see every day
There are a few practical terms that help make sense of a forex screen. A pip is the typical smallest price increment for most currency pairs and is usually in the fourth decimal place (0.0001). For yen pairs the pip is often the second decimal (0.01). Lot size standardises trade quantities: a standard lot is 100,000 units of the base currency, a mini lot 10,000 and a micro lot 1,000. The spread is the difference between the broker’s buy and sell price for a pair; it’s effectively a trading cost you pay when entering a position.
Two related concepts are margin and leverage. Margin is the cash you must put up to open or maintain a leveraged position. Leverage lets you control a larger position with a smaller amount of capital—common retail leverages might range from modest multiples up to high ratios, depending on the broker and regulation. For example, with 50:1 leverage a $1,000 deposit controls $50,000 of currency. Leverage magnifies both profits and losses.
A simple trade example
Imagine EUR/USD trades at 1.1000 and you believe the euro will strengthen. You buy one mini lot (10,000 euros). At this size, each pip move is worth about $1. If the pair rises to 1.1030 and you close the trade, you gain 30 pips, or roughly $30 before costs. If instead the pair drops by 30 pips, you would lose about $30. If you used leverage, the margin you needed to open the position would be smaller than the full position value, but your gains and losses would still be calculated on the full exposure.
Who participates and why
Participants in the forex market are diverse. Large commercial banks and central banks move huge amounts of currency for monetary operations and reserves management. Corporations transact in forex to pay suppliers and hedge foreign-currency exposure. Hedge funds and institutional investors trade for profit or portfolio diversification. Retail traders participate for speculation, hedging, or to express views about economic events. Because the market is large and liquid, many instruments are available: spot forex, forwards, futures and options, and retail derivatives such as CFDs.
What moves exchange rates
Exchange rates move in response to supply and demand, and multiple factors influence that balance. Central bank policy—interest rate decisions, guidance and unconventional measures—can have large effects on currencies because they change expected returns and money supply. Economic data such as inflation, employment figures and GDP growth shape market expectations about monetary policy and economic health. Geopolitical events, elections and shocks can cause rapid moves as traders reassess risk. Finally, market sentiment and technical price patterns can accelerate trends as participants respond to price action itself.
How beginners typically start
Most new traders begin by learning terminology and practising on a demo account that simulates live prices without risking real capital. A common path is: choose a regulated broker with a clear fee structure, open a demo account to test the platform and ideas, study a handful of major pairs (they tend to have tighter spreads and higher liquidity), build a simple trading plan, and trade small sizes to practice risk management. Educational resources and a trading journal help create discipline and capture lessons from each trade.
Common trading approaches
Trading styles vary by time horizon and method. Day traders open and close positions within the same day and focus on short-term price moves. Swing traders hold positions for days to weeks and try to capture intermediate trends. Position traders take longer-term directional bets based on macro fundamentals. Some traders rely on technical analysis—chart patterns, indicators and price action—while others trade around economic releases or follow carry trades driven by interest rate differentials. Whichever method you choose, a consistent plan and risk rules matter more than any indicator.
Risks and caveats
Forex trading can be accessible and offers many trading hours and liquid markets, but it carries significant risk. Leverage can amplify losses and in volatile conditions you can lose more than your initial deposit, depending on the product and broker. Spreads widen and slippage can occur during major news events or low-liquidity periods, affecting execution. Counterparty risk exists if you trade with an unregulated or poorly capitalised broker. Psychological factors—fear, greed and overtrading—are common causes of persistent losses. Always treat trading as a professional activity: define how much you are willing to risk per trade, use stop-loss orders, test strategies in a demo environment, and maintain realistic expectations. This article does not provide personalised advice; consider seeking independent professional guidance if you need tailored recommendations.
Practical next steps if you want to learn more
If you’re curious to explore further, start with the fundamentals: practice reading currency quotes, try small demo trades, and follow economic news that moves markets. Study basic risk management—position sizing, stop-loss placement and diversification—and keep a trading journal to reflect on outcomes. Take time to compare brokers on regulation, execution quality and costs before moving to a live account.
Key Takeaways
- Forex is the global market for exchanging currencies, quoted in pairs where you buy one currency and sell another.
- Important concepts include pips, lots, spreads, margin and leverage—leverage can magnify gains and losses.
- Currencies move because of central bank policy, economic data, geopolitical events and market sentiment.
- Trading carries risk; practise on a demo account, use clear risk rules, and consider professional advice if needed.
References
- https://www.ig.com/en/forex/what-is-forex-and-how-does-it-work
- https://www.home.saxo/learn/guides/forex/how-to-start-forex-trading
- https://tastytrade.com/learn/trading-products/forex/what-is-forex-trading/
- https://www.cfainstitute.org/programs/cfa-program/careers/forex-trader
- https://www.investopedia.com/terms/f/forex.asp
- https://tastytrade.com/learn/trading-products/forex/how-to-trade-forex/
- https://www.tastyfx.com/learn/what-is-forex/
- https://www.nerdwallet.com/investing/learn/forex-trading
- https://www.oanda.com/us-en/trading/