Currency Trading: What Beginners Should Know

What the forex market is

The foreign exchange market is where currencies are exchanged. Every time a company pays a foreign supplier, a tourist changes money or a fund buys bonds abroad, it happens in forex. It is not a single exchange: it is a global network of banks, dealers, brokers and electronic platforms quoting prices to each other.

Because there is no central exchange, the market runs continuously from Sunday evening to Friday evening GMT as trading passes from Sydney to Tokyo, London and New York. The Bank for International Settlements estimated average turnover at around $7.5 trillion a day in its 2022 survey, making it by far the most actively traded market in the world.

Reading a currency pair

Currencies are quoted in pairs, such as EUR/USD 1.0850. The first currency is the base, the second is the quote. The price tells you how many units of the quote currency one unit of the base currency costs. At 1.0850, one euro costs 1.0850 US dollars.

• If you buy EUR/USD, you gain if the euro strengthens against the dollar.
• If you sell EUR/USD, you gain if the euro weakens against the dollar.

Pairs are grouped into majors (the US dollar against the euro, yen, pound, Swiss franc, Canadian, Australian and New Zealand dollars), crosses (two major currencies without the dollar, such as EUR/GBP) and exotics (a major against a smaller currency, such as USD/TRY). Majors normally have the lowest trading costs. Gold is quoted the same way, as XAU/USD.

Bid, ask and spread

Every quote has two prices. The bid is what you can sell at; the ask (or offer) is what you can buy at. The ask is always higher, and the gap is the spread. If EUR/USD is quoted 1.0850 / 1.0851, the spread is 1 pip. The spread is a cost you pay the moment a trade opens, which is why a new position usually starts slightly negative. Trading fees explained covers spreads, commissions and overnight charges.

Pips and lots: turning price moves into money

A pip is the standard unit of price movement. For most pairs it is 0.0001; for pairs involving the Japanese yen it is 0.01. A move in EUR/USD from 1.0850 to 1.0870 is a 20-pip move.

Position size is measured in lots:

So a 20-pip move on one standard lot of EUR/USD is worth $200, up or down. For pairs where the dollar is not the quote currency, the pip value changes with the exchange rate. Our pip value calculator works it out for you, and pips and lot sizes explained shows the maths.

Leverage and margin

Retail forex is almost always traded on margin. You put up a deposit, called margin, and the provider lets you control a position many times larger. At 30:1 leverage, a $100,000 position requires about $3,333 of margin.

Leverage does not change how much a pip is worth; it changes how much of your own money supports the position. That is exactly why it is dangerous: a 1% move against a position leveraged 30 times wipes out roughly 30% of the margin behind it. Regulators limit retail leverage for this reason. In the UK and EU, the cap on major currency pairs is 30:1; in the US it is 50:1. See the margin calculator before opening any leveraged trade.

What moves exchange rates

• Interest rates: higher expected rates tend to attract capital and support a currency. Central bank meetings are among the biggest events in forex.
• Economic data: inflation, employment and growth figures change expectations about rates, which is why prices often jump when major releases come out.
• Risk sentiment: in times of stress, money often flows to perceived safe havens such as the US dollar, Swiss franc, Japanese yen and gold.
• Trade and capital flows: a country that exports more tends to see steady demand for its currency.

Trading sessions

Activity peaks when major financial centres are open. The London session is the busiest; the overlap between London and New York, roughly 13:00 to 17:00 GMT, usually has the tightest spreads. The late US afternoon and the Asian session for European pairs tend to be quieter. Weekend gaps can occur when news breaks while the market is closed.

How a trade works, start to finish

1. You decide on a pair and direction, for example buying EUR/USD because you expect the euro to strengthen.
2. You choose a position size based on how much you are willing to lose if you are wrong. The position size calculator does this from your stop-loss distance.
3. You set a stop-loss, the price at which the trade closes automatically to limit the loss, and optionally a take-profit.
4. The position is marked to market continuously. If it runs past the trading day, an overnight financing charge or credit may apply.
5. You close the trade, and the profit or loss is the pip difference multiplied by the pip value, minus costs.

The risks worth taking seriously

Forex is liquid and accessible, which makes it easy to start and easy to lose money. The main risks are leverage, sudden moves around news, gaps over weekends, and trading with a provider that is not properly regulated. Read our risk management guide and how to spot trading scams before committing money, and practise on a demo account first if your provider offers one.

Currency trading on a screen: what changes when you do it yourself

A trading platform puts the whole process on a screen: you pick a pair, choose a size in lots, set a stop and press buy or sell. The platform makes it look effortless, which is exactly why the maths above matters. Forex currency trading through a broker is almost always leveraged, so a small move in the rate becomes a large move in your account.

Sources

• BIS Triennial Central Bank Survey 2022
• ESMA product intervention measures on CFDs
• NFA forex investor information