Three things to keep
- A forex trade buys one currency and sells another at the same moment; the quote tells you how much of the second currency one unit of the first costs.
- On dollar-quoted pairs, one pip on one standard lot (100,000 units) is worth $10; leverage lets a small deposit control that whole position.
- For a long-term investor, the most useful forex knowledge is often how currency moves affect foreign shares, funds and gold already owned.
This guide explains how forex trading works for readers who have never placed a currency trade, and for investors who simply want to understand the exchange-rate risk already sitting in their portfolio. We start with a single quote and build up to leverage, trading hours, costs and the difference between speculating on currencies and protecting against them.
How forex trading works: the basic exchange
Forex, short for foreign exchange and often shortened to FX, is the market in which one currency is swapped for another. A tourist changing pounds into euros at an airport is taking part in it; so is a car maker converting its American sales back into yen, and a central bank managing its reserves. It is by far the busiest market in the world: the Bank for International Settlements measured average turnover of $9.6 trillion a day in April 2025.
A trade always has two sides. When you "buy EUR/USD", you buy euros and pay for them in US dollars. If the euro then strengthens against the dollar, the euros you hold can be swapped back for more dollars than you paid, and the difference is your profit. If the euro weakens, you lose. Some people search for this as "4x trading", a phonetic spelling of forex; it describes exactly the same activity.
Almost all retail forex trading is done through a broker, either as a spot forex position or as a contract for difference (CFD). Either way you rarely receive the currency itself: you hold an agreement with the broker whose value tracks the exchange rate.
Reading a currency quote
Currencies are quoted in pairs. The first currency is the base, the second is the quote currency, and the price tells you how many units of the quote currency one unit of the base costs. GBP/USD at 1.2700 means one pound costs 1.27 dollars; USD/JPY at 150.00 means one dollar costs 150 yen.
Brokers show two prices. The lower one, the bid, is what you receive when you sell; the higher one, the ask, is what you pay when you buy. The gap is the spread, and it is the first cost of every trade.
| Group | What it means | Examples |
|---|---|---|
| Majors | The US dollar against another heavily traded currency | EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD |
| Crosses | Two major currencies without the dollar | EUR/GBP, EUR/JPY, GBP/JPY |
| Exotics | A major currency against a less widely traded one | USD/TRY, EUR/PLN, USD/ZAR |
The busier the pair, the narrower its spread tends to be. Exotic pairs can cost many times more to trade and can move violently when liquidity dries up.
Pips, lots and what a move is worth
Exchange rates move in tiny steps, so traders measure them in pips. On most pairs a pip is the fourth decimal place, 0.0001; on pairs involving the Japanese yen it is the second decimal place, 0.01. Many platforms show one extra digit, a fraction of a pip often called a pipette.
Position size is measured in lots. One standard lot is 100,000 units of the base currency; a mini lot is 10,000 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 exactly $10. For other pairs the value depends on the exchange rate: one standard lot of USD/JPY at 150.00 is worth about $6.67 per pip (100,000 × 0.01 ÷ 150). Our pip calculator does this for any pair.
A worked trade, step by step
These numbers are illustrative only. Suppose you buy 0.5 lots of GBP/USD, which is 50,000 pounds, at 1.2700, and later sell at 1.2750.
- Movement: 1.2750 − 1.2700 = 0.0050, which is 50 pips.
- Pip value: 0.5 lots × $10 = $5 per pip.
- Result before costs: 50 × $5 = $250.
The same 50-pip move in the other direction would have cost $250. Notice how small the move is: the rate changed by only about 0.39%. It is leverage that turns small percentage moves into meaningful sums.
Leverage and margin
A 0.5-lot GBP/USD position at 1.2700 is worth $63,500 (50,000 × 1.27). Few people trade with that much cash. Instead the broker asks for a deposit called margin and lends the rest of the exposure. At 30:1 leverage, the margin is $63,500 ÷ 30 = $2,116.67. The $250 gain in the example above is roughly 11.8% of that margin, from a price change of well under half a percent.
Retail leverage is capped in many countries. In the UK and EU, CFD providers may offer retail clients at most 30:1 on major currency pairs, 20:1 on non-major pairs and gold, and lower limits on other assets. Australia's caps are similar. In the United States, retail forex is limited to 50:1 on major pairs and 20:1 on others. UK and EU rules also require a broker to start closing positions when your margin level falls to 50%, and retail clients there are protected against losing more than their account balance. Our margin calculator shows the deposit for any pair and leverage.
When the market is open
Forex has no single exchange, so it follows the business day around the world. Trading runs from 17:00 New York time on Sunday until 17:00 New York time on Friday, passing through overlapping sessions centred on Sydney and Tokyo, then London, then New York. Activity, and usually liquidity, is highest when London and New York overlap.
Every day at 17:00 New York time, open positions are rolled over to the next value date. At that moment you pay or receive a swap (also called a rollover or overnight financing charge), which reflects the interest-rate difference between the two currencies plus the broker's margin. Because currency settlement skips the weekend, most brokers apply three days of swap on one night, usually Wednesday. Our trading fees guide shows how swaps add up for positions held for weeks.
What moves exchange rates
Currencies are, in effect, a vote on one economy relative to another. The main influences are:
- Interest rates. Higher expected rates tend to attract capital and support a currency, which is why central bank meetings move markets.
- Inflation and growth data. Employment, inflation and output figures change expectations for interest rates.
- Trade and capital flows. Exporters, importers and international investors must all convert money.
- Risk appetite. In stressful periods, money often moves towards currencies regarded as safe, such as the dollar, yen and Swiss franc.
- Politics and surprises. Elections, policy shocks and interventions can reprice a currency in minutes.
None of these makes short-term moves predictable. Markets react to the difference between what was expected and what happened, and professionals with faster data are on the other side.
Where gold fits
Gold is quoted like a currency pair, XAU/USD, meaning the price of one troy ounce in US dollars, and it trades on almost the same weekday schedule as forex. A standard lot of gold is commonly 100 ounces, so a $1 move in the gold price changes a one-lot position by $100. Retail leverage on gold in the UK and EU is capped at 20:1.
Because it is priced in dollars, gold held by investors elsewhere carries a built-in currency exposure: a British holder gains from a rising gold price but loses some of that gain if the dollar falls against the pound at the same time.
Currency risk for long-term investors
You do not need to trade forex to be exposed to it. Consider an illustrative US investor holding €20,000 of European shares. With EUR/USD at 1.10 the holding is worth $22,000. If the shares are unchanged in euros but EUR/USD falls to 1.00, the holding is worth $20,000, a loss of about 9.1% in dollar terms caused entirely by the exchange rate.
That is why many international funds offer "currency-hedged" share classes, which use forward contracts to offset most of the exchange-rate effect. Hedging has a cost, linked to the interest-rate difference between the two currencies, and it removes currency gains as well as losses. Whether it suits you depends on your home currency, your time horizon and how much short-term volatility you can accept; it is a question worth putting to a regulated adviser.
Before you consider trading
If, having read this far, you are thinking of opening a trading account, three steps come first. Check that the broker is authorised by a regulator where you live, using the regulator's own register (our ten-point broker checklist explains how). Understand every cost you will pay, including spreads, commissions and swaps. And decide the maximum you are willing to lose on each trade before you place it; the position size calculator turns that figure into a lot size.
Many people find that a demo account and a small amount of reading answer the question of whether short-term trading suits them far more cheaply than real money does.
Reader questions
What does 4x trading mean?
4x trading is simply a phonetic spelling of forex trading: buying one currency while selling another, usually through a broker's platform.
How much is one pip worth?
On pairs quoted in US dollars, such as EUR/USD, one pip on one standard lot (100,000 units) is worth $10. On other pairs it depends on the exchange rate; the pip calculator works it out.
Can I lose more than I deposit trading forex?
With UK and EU brokers, retail clients have negative balance protection, so losses are limited to the account balance. Elsewhere this protection may not apply, and in every case you can lose your whole deposit.
Sources
- Bank for International Settlements, Triennial Central Bank Survey 2025
- UK Financial Conduct Authority, CFD product 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