The picture in three lines
- A currency pair prices one currency in another; buying EUR/USD means buying euros and paying in dollars.
- Prices move in pips, positions are measured in lots, and together they fix what each move is worth in money.
- Retail forex is almost always leveraged, so position size matters more than the direction you pick.
How forex trading works is easiest to see from the quote upward. Every trade is an exchange of one currency for another at a price that changes many times a second. Everything else, from lot sizes to margin calls, is built on top of that one idea, so we will build it the same way, one layer at a time.
Layer one: the currency pair
Currencies are always quoted in pairs, such as EUR/USD, GBP/USD or USD/JPY. The first currency is the base and the second is the quote. A price of 1.0850 for EUR/USD means one euro costs 1.0850 US dollars. If you buy the pair, you are buying euros and selling dollars; if you sell it, the reverse.
You will always see two prices. The lower one, the bid, is what you get if you sell. The higher one, the ask, is what you pay to buy. The gap is the spread, and it is the cost of getting in and out before any commission. On busy major pairs it is usually a fraction of a pip to a couple of pips; on less-traded pairs and at quiet hours it can be many times wider.
Layer two: pips and lots
Exchange rates move in small steps. For most pairs the standard step, called a pip, is the fourth decimal place, 0.0001. For pairs quoted in Japanese yen it is the second decimal place, 0.01. Many platforms show a fifth digit, which is a tenth of a pip.
Because single pips are tiny, positions are large. They are counted in lots of the base currency:
| Lot type | Units of base currency | Value of one pip on EUR/USD |
|---|---|---|
| Standard | 100,000 | $10.00 |
| Mini | 10,000 | $1.00 |
| Micro | 1,000 | $0.10 |
When the US dollar is the quote currency, as in EUR/USD, one pip on a standard lot is always $10. When the dollar is the base, the value depends on the price: for USD/JPY at 150.00, one pip on a standard lot is 0.01 × 100,000 ÷ 150 = about $6.67. The pip calculator handles every combination, including cross pairs.
How forex trading works, step by step
Fig. 1 · The life of one forex trade
- Choose a pairDecide which two currencies you have a view on.
- Pick a directionBuy if you expect the base to strengthen, sell if you expect it to weaken.
- Size itSet lots from the amount you are prepared to lose, not from the balance.
- Set exitsPlace a stop-loss and, if you use one, a profit target.
- Watch marginCollateral is locked while the trade is open; losses reduce your free margin.
- CloseSelling what you bought, or buying back what you sold, fixes the result.
Step three is where most beginners go wrong. The usual discipline is to decide the maximum loss first, say 1% of the account, then work out the position that loses exactly that much if the stop is hit. The position size calculator does this sum for you.
Layer three: leverage and margin
A standard lot of EUR/USD at 1.0850 controls 108,500 dollars' worth of currency. Few retail traders have that, so providers let you open the position with a deposit called margin. At 30:1 leverage the margin is one-thirtieth of the position: 108,500 ÷ 30 = $3,616.67.
The profit and loss, though, is calculated on the whole $108,500. A 50-pip move, which is an ordinary day for EUR/USD, is worth 50 × $10 = $500, which is about 13.8% of that margin. Fewer than eight such moves against you would consume all of it, and a UK or EU provider would start closing the position well before that.
For this reason regulators cap retail leverage. In the UK, EU and Australia the limit on major pairs is 30:1 and on other pairs 20:1; in the US it is 50:1 on majors and 20:1 on others. UK and EU providers must also close positions when your margin falls to half of what is required, and retail clients there cannot lose more than the money in the account. The margin calculator shows the collateral for any size and leverage.
Orders you will meet on a platform
| Order type | What it does | Watch out for |
|---|---|---|
| Market | Fills now at the best available price | The fill can differ from the price on screen in fast markets |
| Limit | Buys below or sells above the current price, only at your level or better | May never fill if the price does not reach it |
| Stop | Becomes a market order once a price is touched; used for stop-losses and breakout entries | Can fill beyond the level after a gap |
| Trailing stop | A stop that follows the price at a set distance as the trade moves in your favour | Usually runs on the provider's server only while it is active |
| Guaranteed stop | Closes at exactly your level, even through a gap | Normally carries an extra charge if triggered |
Practise placing and editing each type in a demo mode before using real money. A misplaced decimal in an order ticket is an expensive way to learn the software.
The trading week and its sessions
The market opens at 17:00 New York time on Sunday, which is Monday morning in Sydney and Tokyo, and closes at 17:00 New York time on Friday. In between, activity rolls from the Asia-Pacific centres to London and then New York. The London–New York overlap is usually the busiest stretch with the narrowest spreads.
Every day at 17:00 New York time, open positions roll over to the next value date and a financing adjustment, often called swap, is charged or paid. Because spot trades settle two days ahead, the adjustment taken on Wednesday usually covers the weekend as well, so it is roughly three times the normal amount.
What moves exchange rates
- Interest rates. Expectations about central-bank decisions are the single biggest driver. A currency whose rates are expected to rise tends to attract buyers.
- Economic releases. Inflation, employment and growth data arrive on a published calendar and can move a pair sharply within seconds.
- Risk appetite. In periods of stress, money tends to flow toward the US dollar, the yen and the Swiss franc.
- Flows. Trade, investment and large company transactions all require currency conversion.
The costs on every trade
You pay the spread each time you open and close, possibly a commission per lot, and the overnight financing charge on anything held past 17:00 New York time. If your account is in a different currency from the pair's profit, there may be a conversion as well. Our page on trading fees sets out each line with a worked total.
Platforms, software and the "forex download"
A forex broker gives you access through its own web platform, a mobile app or third-party software such as MetaTrader. There is no forex download on Wyvexx, because we are not a broker and have no platform. If you do install trading software, get it only from the regulated firm's own website or an official app store, and check the firm on the regulator's register first. Fake trading apps, sent as direct download links through chat groups, are one of the most common routes into investment scams.
A complete worked example
Illustrative figures. You buy 0.5 lots of GBP/USD at 1.2700, with a stop-loss at 1.2660 and a target at 1.2780.
- Pip value: 0.5 lots × $10 = $5 per pip.
- Distance to stop: 1.2700 − 1.2660 = 40 pips, so the planned loss is 40 × $5 = $200.
- Distance to target: 1.2780 − 1.2700 = 80 pips, so the planned gain is 80 × $5 = $400.
- Spread of 1.5 pips paid on entry: 1.5 × $5 = $7.50, which comes off either result.
The stop and target are plans, not guarantees. In a fast market, or over a weekend gap, a stop can be filled at a worse price than the one you set.
Asked and answered
How much money do I need to start trading forex?
Providers set their own minimums, but the more useful question is how much you can afford to lose. With micro lots, one pip on EUR/USD is worth ten cents, so small accounts can keep risk per trade small.
Is forex trading open at weekends?
No. The main market closes at 17:00 New York time on Friday and reopens at 17:00 on Sunday. Prices can open at a different level on Sunday if news broke over the weekend.
Can I lose more than I deposit?
For retail clients of UK and EU providers, negative balance protection limits losses to the money in the account. Elsewhere that protection may not apply, so check the provider's terms.
Sources
- European Securities and Markets Authority, CFD product intervention measures
- UK Financial Conduct Authority, CFD rules for retail clients
- Australian Securities and Investments Commission, CFD product intervention order
- US Commodity Futures Trading Commission and NFA, retail forex leverage limits