Trading 101: How Markets Work

Lesson 1: What you can trade

Forex is the exchange of one currency for another, quoted in pairs like EUR/USD. Stocks are shares in companies. Futures are standardised contracts to buy or sell something at a future date, traded on exchanges like the CME. Crypto trades around the clock on exchanges and some brokers. Many retail brokers also offer CFDs, contracts that track a price without owning the asset. CFDs aren't available to retail traders in the US.

Lesson 2: Why prices move

Price moves when buyers are more aggressive than sellers, or the reverse. In the short term that's driven by order flow and news; over longer periods by interest rates, earnings, growth and risk appetite.

Lesson 3: Bid, ask and spread

Every market has two prices. The bid is what you can sell at; the ask is what you can buy at. The gap is the spread, a cost you pay on every trade. In forex, prices move in pips: 0.0001 for most pairs and 0.01 for JPY pairs. Try the pip value calculator.

Lesson 4: Order types

• Market order: fill now at the best available price.
• Limit order: fill only at your price or better.
• Stop order: becomes a market order once price reaches a level. A stop loss is a stop order that closes a losing trade.

Lesson 5: Leverage and brokers

Leverage lets you control a large position with a small deposit (margin). It magnifies losses exactly as much as gains. Regulators in the UK, EU and Australia cap retail leverage on major forex pairs at 30:1, and in the US it's 50:1. A broker gives you access to the market; choose one regulated by a top-tier authority. Our broker comparison starts with regulation for that reason.

Next: learn how to protect your account in Risk Management Basics.