Three things to take away
- A forex trade exchanges one currency for another; the price tells you how much of the second currency one unit of the first costs.
- Profit and loss are counted in pips and scaled by position size in lots, which is why small moves can still mean large sums.
- Most retail forex is traded with leverage through a broker, and leverage limits exist because losses can build very fast.
How forex trading works can be summed up in one sentence: you exchange one currency for another, hoping the exchange rate moves in your favour before you swap back. Everything else in this lesson, from pips to leverage to trading sessions, is detail on top of that idea. If you have ever changed money before a holiday and noticed the rate at the airport was different from the one online, you have already met the basics.
Currency pairs and how to read them
Currencies are always quoted in pairs, because you can only price a currency in terms of another. In GBP/USD 1.2700, the pound is the base currency and the US dollar is the quote currency. The number means one pound costs 1.2700 dollars.
- Buying GBP/USD means buying pounds and paying in dollars. You gain if the pound strengthens.
- Selling GBP/USD means selling pounds for dollars. You gain if the pound weakens.
Pairs are usually grouped into majors (the US dollar against another large currency, such as EUR/USD or USD/JPY), crosses (two currencies without the dollar, such as EUR/GBP) and exotics (a major currency against a smaller economy's currency). Majors tend to have the narrowest spreads because they trade the most.
Every quote has two sides. If GBP/USD shows 1.2699 / 1.2701, you can sell at the lower number and buy at the higher. The difference is the spread, and it is the first cost of every trade.
Pips, lots and what a move is worth
Exchange rates move in small steps. The standard unit is the pip: 0.0001 for most pairs and 0.01 for pairs that include the Japanese yen. A move in GBP/USD from 1.2700 to 1.2730 is 30 pips.
Position size is measured in lots. One standard lot is 100,000 units of the base currency. Smaller sizes are common: a mini lot is 10,000 units and a micro lot 1,000. For any pair where the US dollar is the quote currency, one pip on one standard lot is worth $10, so one pip on 0.1 lots is $1.
Our pip calculator does this for any pair, including crosses where the pip is worth an amount in another currency that must be converted.
A worked example
The figures below are illustrative. Suppose you buy 0.3 lots of GBP/USD at 1.2700 and place a stop-loss 30 pips lower, at 1.2670, and a target 60 pips higher, at 1.2760.
- Pip value: 0.3 × 100,000 × 0.0001 = $3 per pip.
- If the stop is hit: 30 pips × $3 = a $90 loss, plus costs.
- If the target is reached: 60 pips × $3 = a $180 gain, minus costs.
- Position value: 0.3 × 100,000 × 1.2700 = $38,100. At 30:1 leverage the broker would hold $38,100 ÷ 30 = $1,270 as margin.
Notice that a $1,270 deposit controls a $38,100 position. That is what leverage does, and it is why the size of the position, not the size of the deposit, decides how much you can lose. The position size calculator works the other way round: tell it how much you are prepared to lose and it tells you the size.
Leverage, margin and why limits exist
Because currencies usually move less in a day than shares or crypto, forex brokers let clients trade with leverage. Regulators cap how much. For retail clients in the UK and EU, the limit is 30:1 on major pairs and 20:1 on others; Australia's regulator applies similar caps, and in the United States the retail limit is 50:1 on major pairs and 20:1 on the rest.
Margin is the deposit a broker sets aside to support an open position. If losses eat into it, the broker may issue a margin call and, in the UK and EU, must start closing positions once your account falls to 50% of the margin required. Retail clients there are also protected from ending up with a negative balance. The margin calculator shows how much any trade locks up.
When the market is open
Unlike stock exchanges, forex has no single building or closing bell. Trading follows the sun from Sunday 17:00 New York time, when the Asia-Pacific centres start their Monday, to Friday 17:00 New York time. The main centres are Sydney, Tokyo, London and New York. Activity is heaviest when London and New York overlap, and spreads tend to be widest in the quiet hour around the daily rollover at 17:00 New York time.
Positions held past that rollover usually pay or receive a small overnight financing charge called a swap. On most platforms Wednesday's charge is roughly triple, because it covers the weekend.
Reading a forex trading chart
A forex trading chart plots the exchange rate over time. Most platforms default to candlesticks: each candle covers one period (a minute, an hour, a day) and shows where the price opened, closed, and the highest and lowest points it reached. A candle that closed higher than it opened is usually drawn hollow or in a lighter colour; one that closed lower is filled or darker.
Three habits help beginners read charts more calmly:
- Check the time frame first. A sharp drop on a one-minute chart may be invisible on a daily one.
- Remember the chart shows mid or bid prices. The price you buy at is usually a little higher.
- Treat patterns as possibilities, not promises. No shape on a chart guarantees what happens next.
Practising chart reading on a MetaTrader 5 demo account costs nothing and risks nothing, which makes it a sensible place to build the habit.
What moves exchange rates
- Interest rates. Central banks set short-term rates, and markets react to what they expect those banks to do next.
- Economic releases. Inflation, employment and growth figures appear on published calendars and can move rates within seconds.
- Risk appetite. In nervous periods, money often moves towards currencies seen as safer, such as the US dollar, Swiss franc and Japanese yen.
- Trade and capital flows. Companies paying for imports and investors buying foreign assets all need currency.
What it costs
The spread is paid on every trade. Some accounts add a commission per lot instead of, or on top of, a wider spread. Overnight swaps apply to positions held past the rollover, and a currency conversion may apply if your account is held in a different currency from the pair's profit. The trading fees lesson adds these up with examples.
Mistakes beginners make most often
- Choosing size from leverage. The maximum leverage on offer is a ceiling set by the rules, not a recommendation. Size positions from the loss you can accept.
- Trading without a stop-loss. A small losing trade left open can become a large one while you sleep.
- Ignoring the calendar. Major data releases and central bank decisions can widen spreads and move rates sharply in seconds.
- Forgetting financing. Positions held for weeks pay swaps every night, which can quietly erode any gain.
- Moving the stop further away to avoid taking a loss, which turns a planned risk into an unplanned one.
None of these is about predicting the market. They are about controlling the part you can control: how much you stand to lose on each trade.
Before you go further
Check that any broker you consider is authorised by the regulator where you live, using the regulator's own register. Our platform checklist covers the rest.
Quick answers
How much money do I need to trade forex?
Brokers set their own minimums, and micro lots make small trades possible. The more useful question is how much you could lose on each trade without hardship; the position size calculator turns that figure into a trade size.
Is forex trading gambling?
It is a market with real economic purposes, but short-term leveraged trading has a wide spread of outcomes and most retail accounts lose money. Treat it as high risk, whatever it is called.
Can I practise without risking money?
Yes. Many brokers offer demo accounts with virtual money on platforms such as MetaTrader 5. Demo results do not include the emotions and some costs of real trading, so treat them as practice only.
Sources
- UK Financial Conduct Authority, CFD rules for retail clients
- European Securities and Markets Authority, CFD product intervention measures
- US Commodity Futures Trading Commission and National Futures Association, retail forex leverage limits