What is forex? The currency market in plain words

Forex is short for foreign exchange: swapping one currency for another. Banks, companies, funds, governments and individual traders do it for trade, travel, hedging and speculation. There is no central exchange. Trading happens over the counter, through a network of banks and dealers, from Monday morning in Asia to Friday afternoon in New York.

It is the largest financial market. The Bank for International Settlements (BIS) measured average turnover of about $9.6 trillion a day in April 2025, with the US dollar on one side of about 89% of all trades.

As a retail trader you usually trade with a dealer, not on an exchange. The CFTC points out that the dealer is the other side of your trade, controls the prices on your screen and earns from spreads and fees. In the US, a dealer that takes the other side of retail forex trades must be registered with the CFTC and be a member of the NFA; elsewhere, check your own regulator before you deposit anything.

Currency pairs: base, quote, bid, ask and spread

A forex price is always a pair. In EUR/USD 1.0850, the euro is the base currency and the US dollar is the quote currency: one euro costs 1.0850 dollars. Buying the pair (going long) is a bet that the euro rises against the dollar. Selling it (going short) is the reverse, and shorting a pair is as routine as buying one.

Every quote has two prices, as in the drawing at the top: 1.0850 / 1.0852. The bid (1.0850) is what you get when you sell; the ask (1.0852) is what you pay when you buy. The 0.0002 gap is the spread, 2 pips, and it is your cost to get in and out. Spreads are usually tightest on the most traded pairs and widen in quiet hours and around news; the bid-ask spread guide explains why.

Hypothetical: you buy 10,000 euros of EUR/USD at the ask, 1.0852. Each pip is worth $1 at that size, so you start $2 down because of the spread. If the bid rises to 1.0902, you are up 50 pips, +$50. If it falls to 1.0802, you are down 50 pips, −$50. Positions held past the daily rollover, around 5:00 p.m. ET, usually pay or earn a small financing amount (swap or rollover) based on the two interest rates and the dealer’s markup.

Pairs fall into three groups:

  • Majors: the US dollar against the euro, yen, pound, Swiss franc, or the Canadian, Australian or New Zealand dollar, such as EUR/USD, USD/JPY and GBP/USD. Usually the tightest spreads.
  • Crosses: two major currencies without the dollar, such as EUR/GBP or EUR/JPY.
  • Exotics: a major currency against a smaller or emerging-market one. Often wider spreads and sharper jumps.

What is a pip? Pip value and lot sizes

A pip is the standard unit of price change: 0.0001 for most pairs (the fourth decimal) and 0.01 for pairs quoted in Japanese yen. Many platforms show one more digit, a pipette, worth a tenth of a pip. A move from 1.0850 to 1.0875 is 25 pips.

A lot is the trade size in units of the base currency: a standard lot is 100,000 units, a mini lot 10,000 and a micro lot 1,000. When the US dollar is the quote currency (EUR/USD, GBP/USD, AUD/USD, NZD/USD), the pip value is exact: 0.0001 × 100,000 = $10 per pip for a standard lot, $1 for a mini and $0.10 for a micro.

For other pairs, the pip value comes out in the quote currency and has to be converted. On USD/JPY a pip is 0.01, so a standard lot moves ¥1,000 per pip; at a hypothetical rate of 150.00 that is 1,000 ÷ 150 ≈ $6.67. Lot size is where beginners get hurt: the same 30-pip stop costs $3 on a micro lot, $30 on a mini and $300 on a standard lot of EUR/USD.

Turn your phone sideways to read the drawing. Tap to close.

A small hand-drawn table: standard 100,000 → about $10 per pip, mini 10,000 → about $1, micro 1,000 → about $0.10, for USD-quoted pairs, with a note: lot size sets the risk per pip.

Forex trading sessions: when the market is busiest

Forex trades 24 hours a day, five days a week. By market convention the week opens around 5:00 p.m. ET on Sunday, as Asia-Pacific trading starts, and closes around 5:00 p.m. ET on Friday. Activity rolls from one financial center to the next, and traders name those stretches, the sessions, after the cities.

The London–New York overlap, roughly 8:00 a.m. to noon ET (3:00 to 7:00 p.m. in Riyadh until November 1, 2026, then 4:00 to 8:00 p.m.), is usually the busiest stretch, and major US data at 8:30 a.m. ET lands inside it. Late in the New York afternoon liquidity thins and spreads can widen. Weekends carry gap risk: news can break while the market is shut, and Sunday’s open can be far from Friday’s close, jumping straight past a stop. For the stock market’s own schedule, see US stock market hours.

Session hours are conventions, not official times: sources differ by an hour, London and New York shift one hour later in northern winter, and Sydney follows Australian daylight saving. Approximate hours in UTC during northern summer:

  • Sydney: about 21:00 to 06:00 UTC.
  • Tokyo: about 00:00 to 09:00 UTC.
  • London: about 07:00 to 16:00 UTC.
  • New York: about 12:00 to 21:00 UTC.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn 24-hour bar in UTC, ticked 00, 06, 12, 18 and 24, with four overlapping bands for Sydney, Tokyo, London and New York; the London–New York overlap is highlighted as the busiest hours.

What moves currencies?

An exchange rate is the price of one economy’s money in another’s, so it reacts to anything that changes demand for either currency. Prices react to surprises against expectations, and the same report can move a pair either way.

Hypothetical: a jobs report surprises and EUR/USD drops 60 pips in a minute. A long position with a 20-pip stop may be filled several pips beyond the stop, because the price jumped past it. Four drivers do most of the work, as tendencies rather than rules:

  • Interest rates and central banks. Higher expected rates tend to attract money into a currency, so traders watch rate decisions and the gap between two countries’ rates. The Fed and interest rates guide explains how the US central bank works.
  • Economic data. Inflation (CPI), jobs, growth and business surveys change rate expectations. US CPI and the jobs report come out at 8:30 a.m. ET, and Federal Reserve decisions at 2:00 p.m. ET.
  • Risk mood. In a scare, money often moves toward currencies seen as safe havens and away from riskier ones.
  • Trade and capital flows. Exporters, importers and investors moving money across borders buy and sell currencies every day.

Leverage in forex, and why it is dangerous

Leverage lets a small deposit, the margin, control a much larger position. In the US, NFA rules set the minimum deposit at 2% of the position on major currencies, a maximum of 50:1, and 5% on others, 20:1, with higher minimums on some currencies. Other countries set their own limits, and some offshore dealers offer far more.

Hypothetical: a $2,500 account buys one standard lot of EUR/USD at 1.0850, a position worth $108,500. The 2% deposit is about $2,170, so the trade is allowed. But a 50-pip move against you costs $500, 20% of the account, and an ordinary 1% move, about 108 pips, costs about $1,085, 43% of it. The same move in your favour makes the same amount: leverage scales both directions equally.

If losses eat through the margin, the dealer can close your positions automatically, and a fast gap can push the account below zero. The CFTC warns that retail forex customers may be liable for losses beyond their initial deposit. The leverage and margin guide works through this math step by step.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn calculation: 1,000 × 10 = a 10,000 position; a +5% move gives +500 = +50% in green, a −5% move gives −500 = −50% in red, and a note reads −10% wipes out the account.

Forex trading for beginners: risk management and position size

Size every trade from the stop, not from the leverage on offer. Decide the most you will lose on the trade (many traders cap it around 1% of the account), place the stop where the trade idea is proven wrong, and only then work out the size.

Hypothetical: a $5,000 account risking 1% can lose $50. The stop sits 25 pips away, just beyond the level that proves the idea wrong, so each pip may cost $50 ÷ 25 = $2. On EUR/USD that is 2 mini lots (20,000 units), a position worth about $21,700: about 4.3 times the account, far below the maximum allowed. If the stop is hit you lose about $50 plus the spread, and slippage on news can make it more.

The position size calculator applies the same formula to shares, and the risk management guide covers daily limits. Habits that keep beginners in the game:

  • Practise on a demo account until the pip math is automatic.
  • Start with micro lots on one or two major pairs.
  • Check the economic calendar and stay flat into big releases while you learn.
  • Set a daily loss limit and stop trading for the day when you hit it.
  • Avoid holding over the weekend until you understand gap risk.