Forex trading in one paragraph

Forex trading is buying one currency and selling another at the same time, hoping to profit from a change in the exchange rate. If you buy EUR/USD and the euro strengthens against the US dollar, you make money; if it weakens, you lose money. Individuals usually trade forex online through a broker, using leverage, and never handle the actual currency.

The forex market

The foreign exchange market is where the world's currencies are exchanged. It is open 24 hours a day on weekdays and is by far the largest financial market. Banks, companies, governments and investment funds trade in it every day. Individual traders are a small part of the market.

Prices move because supply and demand for each currency change constantly, driven by interest rates, inflation, economic data, trade flows, politics and market sentiment.

How a forex trade works

Currencies are quoted in pairs. EUR/USD at 1.0850 means one euro costs 1.0850 US dollars.

  • Buy (go long) if you expect the first currency to rise against the second.
  • Sell (go short) if you expect it to fall.

Example

You buy 0.10 lots of EUR/USD (10,000 euros' worth) at 1.0850 and later close the trade at 1.0890.

  • The price moved 40 pips in your favour.
  • Each pip on 0.10 lots is worth about $1.
  • Your profit is about $40, minus costs such as the spread.

If the price had fallen 40 pips instead, you would have lost about $40.

What it costs

  • Spread: the difference between the buy and sell price, paid on every trade.
  • Commission: charged per lot on some account types.
  • Swap: an overnight interest charge or credit if you hold a trade past the daily rollover.
  • Deposit, withdrawal and currency conversion fees, depending on the broker and payment method.

Leverage: the part that changes everything

Brokers let you trade positions much larger than your deposit using leverage. With 1:100 leverage, $100 can control a $10,000 position. That makes small price moves matter a lot, in both directions. It is the main reason most retail traders lose money.

Is forex trading right for you?

Forex trading may suit people who are prepared to study, practise on a demo account, follow strict risk rules and accept losses. It is not a reliable way to earn a salary, and it is not suitable for money you need for living costs, school fees or your business.

How to start learning

  1. Work through our free beginner course, one short lesson at a time.
  2. Learn the key terms in the forex glossary.
  3. Practise on a demo account for several weeks.
  4. Only then consider whether a small live account makes sense, after comparing brokers carefully.