- What is forex?
- What are currency pairs?
- How forex prices are quoted
- What is a pip?
- What is a lot?
- What is the spread?
- Leverage and margin
- Buying and selling forex
- Forex trading sessions
- Fundamental analysis
- Technical analysis
- Popular forex strategies
- Risk management
- Trading psychology
- How to start forex trading
- Common beginner mistakes
What is forex trading?
Forex, short for foreign exchange, is the market in which currencies are exchanged. Every time one currency is exchanged for another, a foreign-exchange transaction takes place.
Forex traders attempt to profit from changes in the relative value of one currency against another. Unlike buying a physical asset, forex is normally traded as a currency pair because the value of one currency is expressed relative to another.
When you trade EUR/USD, you are comparing the euro with the US dollar. You are effectively expressing a view about whether the euro will strengthen or weaken relative to the dollar.
The foreign-exchange market is used by banks, corporations, governments, financial institutions and other participants for purposes including international payments, hedging and speculation. Retail traders can access forex through brokers and trading platforms.
What are currency pairs?
Forex is quoted in pairs. A currency pair contains a base currency and a quote currency.
Consider EUR/USD. EUR is the base currency and USD is the quote currency. If EUR/USD is quoted at 1.1000, the simplified interpretation is that one euro is worth 1.10 US dollars.
| Pair | Base currency | Quote currency |
|---|---|---|
| EUR/USD | EUR | USD |
| GBP/USD | GBP | USD |
| USD/JPY | USD | JPY |
| USD/CHF | USD | CHF |
| AUD/USD | AUD | USD |
| USD/CAD | USD | CAD |
Major currency pairs
Major pairs generally involve the US dollar and another major currency. Examples include EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD and NZD/USD.
Cross currency pairs
Crosses are currency pairs that do not contain the US dollar, such as EUR/GBP, EUR/JPY and GBP/JPY.
Exotic currency pairs
Exotic pairs generally combine a major currency with a currency from a smaller or emerging market. These pairs can have wider spreads and different liquidity characteristics.
How forex prices are quoted
Forex brokers generally show two prices: the bid and the ask.
The bid is the price at which you can generally sell, while the ask is the price at which you can generally buy. The difference between them is the spread.
Spread = Ask price − Bid price
The spread is one of the costs of trading. Wider spreads can make entering and exiting a position more expensive, particularly for short-term traders.
What is a pip in forex?
A pip is a standardised unit used to describe a change in the exchange rate of a currency pair. For many currency pairs, one pip is 0.0001, although pairs involving the Japanese yen are commonly quoted with two decimal places, making one pip 0.01.
For example, if EUR/USD moves from 1.1000 to 1.1050, the move is 50 pips.
Your actual monetary gain or loss depends on factors including position size, the currency pair, entry and exit prices, and the account currency.
What is a forex lot?
A lot describes the size of a forex position. Brokers may offer different contract sizes, but the traditional convention is:
| Lot type | Common nominal size |
|---|---|
| Standard lot | 100,000 units |
| Mini lot | 10,000 units |
| Micro lot | 1,000 units |
| Nano lot | 100 units |
Exact contract specifications vary between brokers and products, so always check the broker's trading specifications before placing a position.
What is the forex spread?
The spread is the difference between the bid and ask price. It is one of the main trading costs faced by forex traders.
Spreads can change according to market conditions. They may widen during periods of low liquidity, major economic announcements or unusually volatile markets.
When comparing forex brokers, traders should look beyond an advertised "minimum spread" and consider the complete cost structure, including commissions, swaps, execution and other applicable charges.
Forex leverage and margin explained
Leverage allows a trader to control a position whose notional value is larger than the amount of capital deposited as margin.
For example, leverage of 1:100 means that, conceptually, $1 of margin could provide exposure of up to $100, subject to the broker's rules and the specific product.
Leverage magnifies exposure. A relatively small movement in the underlying currency can therefore produce a relatively large gain or loss compared with the trader's deposited margin. Regulators warn that forex leverage can lead to substantial losses, potentially including loss of the initial capital and, depending on the arrangement and jurisdiction, more.
Margin is the amount of capital required to maintain a leveraged position. If losses reduce available equity sufficiently, a broker may close positions according to its margin and liquidation rules.
Beginners should understand leverage before using it and should not choose very high leverage simply because a broker makes it available.
How to buy and sell forex
Going long
If you believe the base currency will strengthen relative to the quote currency, you can take a long position.
For example, buying EUR/USD means you are taking a position that benefits if EUR strengthens relative to USD, before considering costs.
Going short
If you believe the base currency will weaken relative to the quote currency, you can take a short position.
Selling EUR/USD means you are taking a position that benefits if EUR weakens relative to USD, before considering costs.
Long → profit if price rises · Short → profit if price falls
Forex trading sessions
Forex activity changes throughout the day as major financial centres open and close. Traders commonly refer to the major sessions as Sydney, Tokyo, London and New York.
| Session | Common characteristic |
|---|---|
| Asian | Often associated with activity in JPY, AUD and NZD pairs. |
| London | Major global trading centre with significant liquidity. |
| New York | Major USD trading activity and overlap with London. |
The London-New York overlap is often watched by traders because activity and liquidity can be relatively high. Actual conditions vary from day to day.
Why do currency prices move?
Currency prices respond to changes in supply, demand and expectations about the relative strength of economies and financial assets.
Important drivers can include:
- Central-bank interest-rate decisions
- Inflation data
- Employment reports
- GDP and economic growth
- Consumer spending
- Government policy
- Political developments
- Geopolitical events
- Commodity prices
- Market sentiment
- Capital flows
- Expectations about future monetary policy
A particularly important concept is that markets often react not simply to whether economic data is good or bad, but to whether the result is better or worse than what traders had already expected.
Fundamental analysis in forex
Fundamental analysis attempts to understand the economic forces influencing a currency.
Interest rates
Interest rates can influence capital flows and the relative attractiveness of assets denominated in different currencies. Traders therefore monitor central-bank decisions and expectations for future policy.
Inflation
Inflation affects purchasing power and can influence monetary-policy decisions. Inflation data is therefore closely watched by forex traders.
Employment
Employment and wage data can provide information about economic strength and potential monetary-policy changes.
Economic growth
GDP and other economic indicators can help traders assess whether an economy is expanding or weakening.
Economic calendar
A forex economic calendar lists scheduled economic events and releases. Major announcements can cause significant volatility, so traders should know when important releases are scheduled before entering positions.
Technical analysis in forex
Technical analysis studies price and volume-related information to identify patterns, trends, momentum and potential trading areas.
Support and resistance
Support refe