What is forex trading?
Forex trading is buying one currency while selling another, with the aim of profiting from changes in their exchange rate. Currencies trade in pairs such as EUR/USD, and retail traders usually trade them through an online broker using leverage, which means small price moves can produce large gains or losses. The market is open 24 hours a day from Sunday evening to Friday evening, New York time.
The foreign exchange market is the largest financial market in the world by trading volume. Most of that volume comes from banks, companies and institutions. Retail traders are a small part of it, and they are competing against professionals with better information and lower costs. Going in with realistic expectations is the first step.
How a forex trade works
Every forex quote shows how much of one currency (the quote currency) it takes to buy one unit of another (the base currency). If EUR/USD is 1.0850, one euro costs 1.0850 dollars.
- If you think the euro will rise against the dollar, you buy EUR/USD.
- If you think it will fall, you sell EUR/USD.
You make or lose money depending on how far the price moves and how large your position is. Our guide to currency pairs explains base and quote currencies, and the difference between major, minor and exotic pairs.
Five terms every beginner needs
| Term | What it means |
|---|---|
| Pip | The standard unit of price movement: 0.0001 on most pairs, 0.01 on JPY pairs |
| Lot | The trade size: standard 100,000 units, mini 10,000, micro 1,000 |
| Spread | The gap between the bid and ask price, which is a cost on every trade |
| Leverage | Controlling a large position with a smaller deposit |
| Margin | The deposit your broker holds while a leveraged position is open |
Each of these has its own guide: what a pip is and how to calculate pip value, forex lot sizes, how the spread works and leverage and margin explained.
A worked example trade
Here is how the pieces fit together. You have a $2,000 account and decide to buy 0.10 lots (10,000 units) of EUR/USD at 1.0850.
- Pip value: 0.0001 x 10,000 = $1 per pip.
- Spread: if the spread is 1 pip, you start the trade $1 down.
- Stop-loss: you place it 30 pips below entry at 1.0820. If it is hit, you lose 30 x $1 = $30, which is 1.5% of the account.
- Take-profit: you place it 60 pips above entry at 1.0910. If it is hit, you gain 60 x $1 = $60, which is 3% of the account.
- Margin: the position's notional value is 10,000 x 1.0850 = $10,850. At 30:1 leverage, about $362 of margin is held while it is open.
The trade risks $30 to make $60, a reward-to-risk ratio of 2:1. Whether it is a good trade depends on how often setups like this actually work, which you can only learn through testing and record-keeping. A risk-reward calculator on our trading tools page can help you plan these numbers before you enter.
How to start trading forex: step by step
- Learn the basics first. Understand pips, lots, spread and leverage until you can calculate a trade's risk without help. Our Trading 101 lesson on how markets work is a good starting point.
- Choose a regulated broker. Look for regulation by a recognised authority, clear costs, a platform you are comfortable with and good customer support. Our guide on how to choose a forex broker walks through the checks.
- Practise on a demo account. Most brokers offer free demo accounts with virtual money. Use one to learn the platform, practise placing stop-losses and test your plan.
- Write a trading plan. Decide which pairs you will trade, when, what your entry and exit rules are, and how much you will risk per trade.
- Start small with real money. Trading live feels different from a demo. Micro lots let you learn with smaller amounts at stake.
- Keep a journal and review it. Record each trade's reason, result and what you learned. Patterns in your mistakes are easier to fix once they are written down.
Choosing a trading approach
Beginners usually do better with a simple, clearly defined approach than with a collection of indicators. Common starting points include trend following, trading ranges between support and resistance, and breakouts. Our trading strategies section explains each style. Whatever you choose, test it on historical data before risking money, and make sure your rules are specific enough that you would make the same decision every time.
It also helps to decide on a timeframe that fits your schedule. If you can only trade in the evening, a strategy that needs you watching the London open will not work. The forex market hours guide shows when each pair is most active.
Risk management basics
Most beginners who lose money do so because of position size and leverage, not because they picked the wrong pair. A few rules make a large difference:
- Risk a small, fixed percentage per trade. Many traders use 1% or less of their account.
- Always use a stop-loss and size the position from the stop distance.
- Use less leverage than you are offered. The maximum is a limit, not a recommendation.
- Do not try to win back losses quickly. Increasing size after a losing streak is how small drawdowns become large ones.
Our risk management basics lesson covers these ideas in more depth.
Common beginner mistakes
- Trading with real money before understanding pip value and position size.
- Using too much leverage on a small account.
- Trading during major news without a plan for wide spreads and fast moves.
- Switching strategies after every few losses instead of testing one properly.
- Expecting steady monthly income. Results vary widely, and many retail traders lose money.
Forex trading involves substantial risk of loss and is not suitable for everyone. Many retail traders lose money when trading leveraged products such as forex and CFDs. This guide is educational and is not financial advice. Read our risk disclaimer before you trade.