Forex Trading Basics

The foreign exchange (forex or FX) market is where currencies are traded. It is the largest, most liquid financial market in the world, with major pairs like EUR/USD and USD/JPY trading around the clock during the business week.

Key takeaways:

Forex is a 24-hour, global market where currencies trade in pairs (for example, EUR/USD).
Most retail forex trading is done with high leverage, which amplifies both gains and losses.
Exchange rates are driven by interest rates, economic data, sentiment and policy expectations.
For many beginners, forex is best approached cautiously, as a small, high-risk segment of a broader plan.

This page covers forex basics: how currency pairs are quoted, what drives exchange rates, how retail forex trading works, common approaches and the key risks that make FX trading challenging for many beginners.

What is the forex market?

The forex market is a decentralized, over-the-counter (OTC) market where banks, financial institutions, corporations, governments and individual traders buy and sell currencies. Unlike stock exchanges, there is no single central marketplace. Instead, trading takes place electronically through a network of banks, brokers and liquidity providers.

Forex trading is typically available 24 hours a day during the business week, moving through major trading sessions:

Asia/Pacific session
European session
North American session

Liquidity and volatility often increase when sessions overlap, such as when London and New York are both open.

Currency pairs and quotes

Currencies are quoted in pairs, such as EUR/USD (euro vs. U.S. dollar). The first currency is the base currency and the second is the quote currency. A EUR/USD quote of 1.10 means one euro is worth 1.10 U.S. dollars.

Common categories of pairs include:

Majors: heavily traded pairs involving the U.S. dollar (EUR/USD, USD/JPY, GBP/USD, USD/CHF).
Minors (crosses): pairs that do not include the dollar (EUR/GBP, EUR/JPY, GBP/JPY).
Exotics: pairs involving emerging-market currencies, such as USD/TRY or USD/ZAR.

Quotes are often displayed with bid and ask prices. The bid is the price at which you can sell the base currency; the ask is the price at which you can buy it. The difference between them is the spread, which is one of the main transaction costs in forex trading.

Pips and lot sizes

Forex price moves are usually measured in pips (percentage in point). For many major pairs, a pip is a movement in the fourth decimal place (for example, 1.1000 to 1.1001). Some brokers quote fractional pips as well.

Positions are often grouped into standard sizes:

Standard lot: 100,000 units of the base currency.
Mini lot: 10,000 units.
Micro lot: 1,000 units.

The value of a pip depends on the pair and the position size. Understanding pip value is essential for sizing trades and managing risk.

What moves exchange rates?

Exchange rates are influenced by many factors, including:

Interest-rate expectations set by central banks.
Inflation trends and economic growth.
Political stability and geopolitical events.
Market sentiment and global risk appetite or risk aversion.

Major announcements such as interest-rate decisions, employment reports and inflation releases can lead to sharp, fast moves in currency pairs. Forex traders often watch economic calendars closely to know when important data is scheduled for release.

How retail forex trading works

Many individual traders access forex through online brokers or CFD (contract-for-difference) providers. These platforms often offer:

High leverage, sometimes far greater than in stock trading.
Tight spreads on major pairs, wider spreads on minors and exotics.
24-hour trading during the week, split across global sessions.

When you open a forex trade, you are usually:

Going long: buying the base currency and selling the quote currency.
Going short: selling the base currency and buying the quote currency.

Leverage means you can control a large position with relatively little capital, but it also means that losses can accumulate quickly if the market moves against you. Some brokers offer negative balance protection; others may not.

Leverage, margin and risk

Forex trading is typically done on margin. You provide a portion of the total position value as collateral, and the broker finances the rest. For example, 30:1 leverage means that $1,000 of margin controls a $30,000 position.

While leverage can make small price moves meaningful, it also increases risk:

Profits and losses are magnified relative to your account size.
Margin calls: if your equity falls below the required margin, the broker may ask for more funds or close positions.
Forced liquidation: aggressive leverage can lead to positions being closed automatically in volatile markets.

Effective risk management – including modest leverage, sensible position sizing and predefined stop levels – is critical for anyone who trades forex.

Common forex trading approaches

Traders use a variety of approaches in the FX market. A few broad examples include:

Trend-following: identifying pairs that are moving steadily in one direction and attempting to trade in the direction of that trend.
Range trading: buying near support and selling near resistance when a pair is trading within a relatively stable range.
News trading: trading around major economic releases, seeking to profit from sharp moves – but also facing high volatility and gap risk.
Carry trades: going long currencies with higher interest rates and short currencies with lower rates, attempting to earn the interest-rate differential over time.

No strategy is guaranteed. Many traders combine technical analysis (charts, indicators) with awareness of key economic events, and all require careful risk control.

Risks in forex trading

Forex trading carries several specific risks:

Leverage risk: small price moves can have a big impact on account equity.
Gap and news risk: markets can jump during or after important announcements, causing slippage and larger-than-planned losses.
Counterparty and regulatory risk: the reliability and regulatory status of the broker or platform you use matters.
Psychological pressure: fast markets and constant price changes can be stressful and lead to emotional decisions.
Overtrading: the 24-hour nature of the market can tempt traders to trade too often or without a clear plan.

Because of this, many educators recommend that beginners start with low leverage, focus on risk management and treat forex as a high-risk segment of an overall portfolio—if they participate at all.

Forex and other markets

Forex does not exist in isolation. Currency trends are closely tied to:

Central bank policy and bond yields.
Commodity prices (for example, currencies of resource-exporting countries).
Equity market sentiment and global risk-on/risk-off moves.

Some traders use forex to express views on macroeconomic themes, while others focus mainly on technical chart patterns and price action. Futures and options on currencies provide additional ways to express similar views, as covered in our pages on futures and options.

Is forex trading right for you?

Forex may appeal to traders who:

Enjoy following global economic news and central bank decisions.
Can commit time to learning risk management and position sizing.
Are comfortable with the idea of high volatility and potential losses.

For many long-term investors, however, it may be more practical to focus on diversified stock and bond portfolios, using currency exposure primarily through international funds or ETFs rather than leveraged forex trading.

Getting started with forex (if you still want to)

If, after understanding the risks, you still want to explore forex trading:

Secure your foundation: consider building core long-term investments in mutual funds, index funds and bonds before committing money to leveraged FX trading.
Choose a regulated broker: check the regulatory status of any platform you consider and understand their leverage limits, margin policies and costs.
Start small and use a plan: define your risk per trade, maximum daily loss and overall strategy before placing real-money trades.
Use demo accounts: practice on a simulated account to get used to the platform and test your approach without real financial risk.
Review and adjust: keep a trading journal and review your results over time, similar to how you would evaluate day trading or other active strategies.

Important: nothing here is personalised advice. Always consider your own financial situation, goals and risk tolerance before trading forex or other leveraged products.

Forex trading FAQ

Is forex trading good for beginners?

Forex trading is accessible, but not necessarily beginner-friendly. High leverage, 24-hour markets and fast price moves can make it challenging. Many beginners may be better off learning the basics of diversified investing first and treating forex, if used at all, as a small and speculative part of an overall plan.

Can I lose more than I deposit in forex trading?

Depending on the broker and regulations in your region, it may be possible to lose more than your initial deposit, especially in highly leveraged accounts and during extreme market moves. Some brokers offer negative balance protection, but this is not universal.

How much leverage should I use in forex trading?

There is no universal answer, but many risk-conscious traders use much lower leverage than the maximum offered. Using modest leverage and small position sizes can help reduce the chance of large drawdowns and margin calls.

Do I need to trade forex to be a successful investor?

No. Many successful investors never trade forex directly. Currency exposure often comes indirectly through international stock and bond funds. A diversified portfolio of long-term holdings can be sufficient for most people without ever opening a forex account.

To see how forex compares with other opportunities, you can also read about futures, options, day trading, mutual funds and bonds. For quick definitions of FX terms like pips, lots and spreads, visit our Dictionary Index.