What Is Forex Trading and How Does It Work?

Forex trading involves exchanging one currency for another or speculating on changes in exchange rates. It takes place in a global, decentralised market used by banks, businesses, governments, institutional investors and individual traders. According to the Bank for International Settlements, global over-the-counter foreign exchange turnover averaged approximately $9.5 trillion per day in April 2025.

This guide explains what forex trading is and how it works, covering currency pairs, pips, spreads, leverage, brokers, analysis methods and the principal risks involved.

Key Takeaways

• Forex trading involves buying one currency while simultaneously selling another through a currency pair.
• Exchange rates are influenced by interest rates, inflation, economic data, political developments and market sentiment.
• A pip is a standard unit used to measure movements in most forex pairs.
• The spread is the difference between a pair’s bid and ask prices and represents a key trading cost.
• Leverage provides greater market exposure with less initial margin, but it also magnifies potential losses.
• A regulated forex broker provides access to prices, trading platforms, order execution and account services.

What Is Forex Trading?

Foreign exchange, commonly called forex or FX, is the process of converting one currency into another. Currency conversion supports international trade, tourism, investment and cross-border payments. For example, a European company importing goods from the United States may need to exchange euros for US dollars to pay its supplier.

Forex trading also allows market participants to speculate on exchange-rate movements. A trader who expects the euro to strengthen against the US dollar might buy EUR/USD. A trader expecting the euro to weaken could sell the same pair.

Unlike shares traded through a central stock exchange, much of the forex market operates over the counter. Transactions take place electronically through a network of banks, financial institutions, liquidity providers, brokers and trading platforms.

The market’s scale is significant. The Bank for International Settlements reported that global OTC foreign exchange turnover averaged about $9.5 trillion per day in April 2025.

Retail forex trading represents only one part of this much larger global market.

How Does Forex Trading Work?

Forex is quoted and traded in pairs because each transaction involves exchanging one currency for another. The price of a currency pair shows how much of the second currency is required to buy one unit of the first.

Base and Quote Currencies

In EUR/USD, EUR is the base currency and USD is the quote currency. If EUR/USD trades at 1.1000, one euro is worth 1.10 US dollars.

When a trader buys EUR/USD, they are expressing the view that the euro may appreciate relative to the dollar. Selling EUR/USD expresses the opposite view.

An exchange rate can rise because the base currency strengthens, the quote currency weakens or both developments occur simultaneously.

Major, Minor and Exotic Currency Pairs

Forex pairs are generally grouped according to their currencies, liquidity and trading activity.

• Major pairs include the US dollar and another widely traded currency. Examples include EUR/USD, GBP/USD and USD/JPY.
• Minor or cross-currency pairs combine major currencies without the US dollar, such as EUR/GBP and AUD/JPY.
• Exotic pairs combine a major currency with one from a smaller or emerging economy, such as USD/ZAR or EUR/TRY.

Major pairs tend to have higher liquidity and tighter spreads than exotic pairs. However, spreads can widen during volatile periods or outside the most active trading hours.

Looking for a forex trading platform? Join Markets.com to access forex CFDs across major, minor, and exotic currency pairs. Eligible new clients can also claim up to $5,000 in bonuses through the ongoing rewards program after completing the qualifying steps.

Ways to Access the Forex Market

Different participants access currency markets through different instruments.

At Markets.com, forex trading is offered through contracts for difference. A forex CFD follows the movement of an underlying currency pair, allowing traders to take long or short positions without taking delivery of either currency. CFDs are leveraged and carry substantial risk.

Forex Trading Hours

The forex market generally operates 24 hours a day from Monday to Friday as activity moves between major financial centres, including Sydney, Tokyo, London and New York.

Trading conditions are not identical throughout the day. Liquidity often increases when major sessions overlap, while spreads may widen around market openings, important announcements, holidays or periods of reduced participation. Exact instrument hours should always be checked on the relevant trading platform.

A Simple Forex Trade Example

Suppose EUR/USD is trading at 1.1000 and a trader buys 10,000 units because they expect the euro to appreciate.

If EUR/USD rises to 1.1050, the pair has moved 50 pips. For a 10,000-unit EUR/USD position, one pip is approximately $1, so the gross change in value would be about $50.

If the exchange rate instead falls by 50 pips, the position would lose approximately $50. This simplified example excludes the spread, commissions where applicable, overnight financing, currency conversion and slippage.

Essential Forex Trading Terms Explained

Learning a few core terms makes forex prices, trading costs and risk easier to understand.

What Is a Pip in Forex?

A pip is a standard unit used to describe a change in a currency pair’s price. For most pairs, one pip is a movement in the fourth decimal place.

For example:

EUR/USD moves from 1.1000 to 1.1001 = one pip.

Pairs involving the Japanese yen are commonly quoted differently. A move in USD/JPY from 150.20 to 150.21 is one pip because the second decimal place is generally used.

A pip’s monetary value depends on the currency pair, position size and account currency. Traders use pip values to estimate potential profit, loss and risk before opening a position.

>> Learn more: What Is a Pip in Forex Trading? Pip Value and Examples

Lots and Position Size

Forex position sizes are often expressed in lots:

• Standard lot: 100,000 units of the base currency
• Mini lot: 10,000 units
• Micro lot: 1,000 units

A larger position produces a larger monetary gain or loss for the same exchange-rate movement. Position size should therefore be based on account equity, stop-loss distance and the amount a trader can afford to risk—not simply on the maximum exposure available.

What Is a Good Spread in Forex?

The spread is the difference between the bid price, at which a trader can sell, and the ask price, at which they can buy.

If GBP/USD is quoted at 1.2750/1.2752, the spread is two pips. Because a position opens at one side of the quote and closes at the other, the spread is part of the trading cost.

There is no single spread that is “good” for every pair or market condition. On liquid major pairs, a spread around 0.0–1.0 pip may be considered tight during active sessions, but raw-spread accounts may charge a separate commission. Exotic pairs usually have wider spreads.

Traders should compare total costs, including:

• Average rather than minimum spreads
• Trading commissions
• Overnight financing or swap charges
• Currency conversion costs
• Possible slippage during volatile markets

>> Explore more: What Is a Spread in Trading? How Forex and CFD Spreads Work

What Is Leverage in Forex Trading?

Leverage allows traders to control a position whose value exceeds the margin deposited to open it.

With 1:30 leverage, for example, $1,000 of required margin could provide exposure to a $30,000 position. If that position moves by 1%, its value changes by approximately $300 before costs. That equals 30% of the initial $1,000 margin.

The same calculation applies in both directions. Leverage can magnify gains, but it can also cause rapid and substantial losses. Available leverage varies according to the instrument, broker, client classification and regulatory jurisdiction.

Margin is not a fee or the maximum possible loss. It is the capital reserved to support a leveraged position. If losses reduce account equity below the broker’s required level, positions may be closed automatically.

>> Read more: What Are Leverage & Margin in Trading and How to Manage Risks?

Start your forex trading journey with Markets.com today. Sign up now to unlock up to $5,000 in new client bonuses, practise risk-free with a demo account, and trade forex CFDs on a powerful multi-asset platform.

What Moves Forex Prices?

Exchange rates respond to changing expectations about economies, interest rates and global risk. Prices may react within seconds when new information differs from what markets anticipated.

What Is Fundamental Analysis in Forex?

Fundamental analysis evaluates the economic and political forces that may affect a currency. Forex traders may monitor central-bank statements, inflation, employment, gross domestic product, retail sales, trade balances and fiscal policy.

The objective is not simply to decide whether a data release is positive or negative. Traders compare the result with market forecasts and consider how it could alter interest-rate expectations.

For example, stronger-than-expected inflation might support a currency if traders believe the central bank will keep interest rates higher. However, the same report may have little effect if that outcome is already reflected in the exchange rate.

Technical and Sentiment Analysis

Technical analysis studies historical price movements to identify trends, momentum and potential entry or exit levels. Traders commonly examine support and resistance, chart patterns, moving averages and indicators such as the Relative Strength Index. These tools cannot predict an outcome with certainty, but they can help traders organise decisions and define risk.

Sentiment analysis evaluates how market participants are positioned and whether risk appetite, fear or optimism is influencing currencies. Traders may review positioning reports, volatility indicators and reactions to economic news. Many forex strategies combine fundamental, technical and sentiment analysis rather than relying on one method alone.

What Is a Forex Broker and How Do You Choose One?

A forex broker connects traders to currency prices and provides the platform through which orders are submitted and positions are managed. Depending on the product and business model, the broker may execute orders with external counterparties or act as the counterparty.

A broker should be assessed on more than advertised spreads. Important considerations include:

1. Regulation and legal entity: Confirm which company will hold the account and which regulator supervises it.
2. Product structure: Understand whether the broker offers spot currency transactions, futures, CFDs or another instrument.
3. Total pricing: Review typical spreads, commissions, financing rates and conversion charges.
4. Execution policy: Check how orders, slippage and volatile market conditions are handled.
5. Platform reliability: Look for suitable charts, order types, alerts and risk-management functions.
6. Account safeguards: Review margin-closeout rules and whether negative balance protection applies.
7. Support and education: Consider service availability, learning materials and demo-account access.

Protections differ by region and client classification. Negative balance protection, for example, may apply only to eligible accounts under specific regulatory rules. It should not be treated as a replacement for position sizing and active risk management.

>> Find out more: Best Forex Brokers with Welcome Bonuses in 2026

Benefits and Risks of Forex Trading

Forex attracts traders because of its liquidity, broad range of currency pairs and extended weekday trading hours. It also allows participants to take positions on economic themes such as monetary-policy divergence or changing commodity prices.

These features do not make forex trading inherently profitable.

Traders can reduce—but never eliminate—risk by limiting position size, using stop-loss orders, avoiding excessive leverage and setting a maximum acceptable loss before entering a trade. A stop-loss may not execute at its requested price during gaps or extreme volatility.

Concentration is another concern. Opening several positions containing the same currency can create more exposure than expected. A trader who buys EUR/USD and GBP/USD while selling USD/JPY may effectively hold multiple positions dependent on US-dollar weakness.

How to Start Forex Trading with Markets.com

Markets.com is a global multi-asset CFD trading platform that provides access to forex, stocks, indices, commodities, cryptocurrencies, ETFs, and more through a single trading account. For forex traders, the platform offers CFDs on major, minor, and exotic currency pairs, allowing you to speculate on both rising and falling exchange rates without owning the underlying currencies. With intuitive trading platforms, advanced charting tools, risk management features, and a demo account for practice, Markets.com is designed to support both beginners and experienced traders. Follow the steps below to get started with forex CFD trading on Markets.com.

Step 1: Learn the Basics of Forex Trading

Before placing your first trade, take time to understand the core concepts of the forex market. Learn how currency pairs work, what pips and spreads mean, how margin and leverage affect your position, and the different order types available. A solid understanding of these fundamentals can help you make more informed trading decisions.

Step 2: Open and Verify Your Markets.com Account

Create a Markets.com trading account by completing the registration process. Depending on the Markets.com entity serving your region, you'll need to verify your identity and complete the required suitability assessment before accessing live trading.

Step 3: Practise with a Demo Account

If you're new to forex trading, consider starting with a Markets.com demo account. The demo environment uses virtual funds, allowing you to explore the platform, test trading strategies, and become familiar with order placement without risking real capital. Keep in mind that demo trading cannot fully replicate live market conditions or the psychological aspects of trading with real money.

Step 4: Choose a Currency Pair and Analyse the Market

Select a forex CFD that matches your trading strategy. Before opening a position, review the pair's trading hours, current spreads, economic calendar events, and technical price levels. Combining fundamental and technical analysis can help you identify potential trading opportunities.

Step 5: Place Your Trade and Manage Risk

Decide whether you expect the currency pair to rise or fall, then choose your position size accordingly. Since forex CFDs are leveraged products, it's important to define your risk before entering the market. Consider using stop-loss and take-profit orders to help manage potential losses and lock in gains if your target is reached.

Step 6: Monitor, Close, and Review Your Trade

After entering the market, monitor your open position and keep track of margin requirements and market developments. Close the trade when your strategy or risk management plan calls for it, then review the outcome to identify lessons that may improve your future trading performance.

Final Thoughts: Understanding Forex Before You Trade

Understanding what forex trading is and how it works begins with recognising that every trade compares two currencies. Exchange rates respond to economic conditions, interest-rate expectations and global sentiment, while pips, spreads, position size and leverage determine how those movements affect an account. Forex offers extensive market access, but leveraged products such as CFDs also expose traders to rapid losses. Before opening a live position, traders should understand the product, check the broker’s costs and regulatory status, practise their process and decide exactly how much capital they are prepared to risk.

FAQs

Is Forex Trading Suitable for Beginners?

Forex can be accessible to beginners, but accessibility should not be confused with simplicity. New traders need to learn how currency pairs, spreads, leverage and margin work. Starting with educational resources and a demo account may help build familiarity before any real capital is committed.

How Do Forex Traders Make Money?

A forex trader aims to profit by correctly anticipating whether one currency will rise or fall relative to another. A long position may gain when a pair rises, while a short position may gain when it falls. Spreads, financing, commissions and slippage reduce net returns.

How Much Money Do You Need to Start Forex Trading?

The minimum amount depends on the broker, account type and instrument. More important than the deposit threshold is whether the account can support sensible position sizing and normal market fluctuations without excessive leverage. Traders should only use money they can afford to lose.

Can You Trade Forex 24 Hours a Day?

Forex generally trades continuously from Monday to Friday because financial centres open in different time zones. Individual instruments may have short breaks or different schedules, and liquidity varies across sessions. Weekend pricing is not generally available for the entire underlying forex market.

Is Forex Trading Legal?

Forex trading is legal in many countries, but regulations, permitted products and leverage limits differ. Traders should confirm that their chosen broker and product are authorised in their jurisdiction. Local tax and reporting obligations may also apply.

Can You Lose More Than Your Deposit in Forex?

It depends on the account, product and applicable regulation. Eligible retail accounts may receive negative balance protection, but this is not universal. Leveraged positions can still lose the entire deposited amount, and professional or unprotected accounts may face additional liability under their terms.