Forex, short for foreign exchange, is the global market for buying and selling currencies. Businesses use it to pay for goods abroad, travellers use it when they change money, central banks use it to manage reserves, and traders use it to speculate on price movements. This guide explains the basics in plain language.
Risk warning: Trading forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. You could lose money rapidly due to leverage. Past performance is not an indication of future results. This article is for education only and is not investment advice.
How the forex market works
Unlike a stock exchange, forex has no single central marketplace. It is an over-the-counter network of banks, brokers and other institutions trading electronically around the world. Trading moves from one financial centre to the next, so the market is open 24 hours a day from Monday to Friday.
Currency pairs
Currencies are always quoted in pairs, such as EUR/USD. The first currency is the base and the second is the quote. If EUR/USD is 1.1000, one euro costs 1.10 US dollars. If you think the euro will strengthen, you buy the pair; if you think it will weaken, you sell it. Learn more in our guide to the main currency pairs.
Key terms you need to know
- Pip: the standard unit of price movement, usually the fourth decimal place (0.0001) in most pairs, and the second decimal place in yen pairs.
- Lot: the trade size. A standard lot is 100,000 units of the base currency, a mini lot is 10,000 and a micro lot is 1,000.
- Spread: the difference between the buy (ask) and sell (bid) price. It is one of the main costs of trading.
- Leverage and margin: leverage lets you control a larger position with a smaller deposit (the margin). It increases potential losses as well as gains.
- Swap: an overnight fee or credit for holding a leveraged position past the end of the trading day.
Market sessions
The forex day is usually split into the Sydney, Tokyo, London and New York sessions. Activity tends to be highest when London and New York overlap, which is often when spreads are tightest and prices move most.
What moves exchange rates?
- Interest rates: decisions by central banks such as the Federal Reserve, ECB and Bank of Japan are among the biggest drivers.
- Economic data: inflation, employment, GDP and retail sales figures.
- Politics and global events: elections, trade disputes and geopolitical tensions.
- Market sentiment: in uncertain times, investors often move into currencies seen as “safe havens”.
How individuals trade forex
Most individuals trade forex through an online broker using a trading platform, often with CFDs or leveraged spot forex. Others gain exposure through funds or copy trading. We compare the options in Ways to invest in forex, and explain the process step by step in How to invest in forex.
Summary
Forex is the market where currencies are exchanged, traded in pairs, around the clock on weekdays. Understanding pips, lots, spreads and especially leverage is essential before you start. Leverage can lead to fast losses, so learn how to manage your risk before trading with real money.
Risk warning: Trading forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. You could lose money rapidly due to leverage. Past performance is not an indication of future results. This article is for education only and is not investment advice.