The lesson in three lines
- A pair such as EUR/USD is the price of one euro in dollars; buying the pair means buying euros and paying in dollars.
- Moves are counted in pips; on a standard lot of a pair quoted in dollars, one pip is worth $10.
- Leverage is capped for retail clients in many countries and multiplies losses just as much as gains.
This forex trading guide assumes you know nothing yet. By the end you should be able to read a currency quote, say what a price move is worth in money, work out the deposit a trade ties up and list every cost it carries. We use made-up but realistic prices throughout, and every sum can be repeated with our calculators.
Reading a currency quote
Currencies are always priced against each other. In EUR/USD 1.1650, the euro is the base currency and the US dollar is the quote currency: one euro costs 1.1650 dollars. If the number rises to 1.1700, the euro has strengthened against the dollar; if it falls to 1.1600, the euro has weakened.
Buying the pair means you expect the base currency to rise against the quote currency. Selling it means the opposite. You do not need to own euros to sell EUR/USD; with a leveraged product you are simply taking the other side of the price.
Two prices, not one
A dealer always shows two prices. The bid is what it will pay if you sell; the ask (or offer) is what it charges if you buy. With EUR/USD shown as 1.16480 / 1.16490, you buy at 1.16490 and sell at 1.16480. The gap, here 1 pip, is the spread, and it is the first cost of every trade.
Majors, minors and exotics
The major pairs all include the US dollar and one of the other heavily traded currencies: the euro, the pound, the yen, the Swiss franc, the Canadian, Australian and New Zealand dollars. Minor or cross pairs, such as EUR/GBP, leave the dollar out. Exotic pairs combine a major currency with one from a smaller economy, and usually have wider spreads and sharper jumps.
Pips and lots: turning a move into money
A pip is the standard step in a currency price: 0.0001 for most pairs and 0.01 for pairs quoted in Japanese yen. Many platforms show one extra digit, a fraction of a pip, which is why you will see five decimal places on EUR/USD.
A lot is the standard trade size. One standard lot is 100,000 units of the base currency; a mini lot is 10,000 and a micro lot is 1,000. Put the two together and you get the value of one pip:
- EUR/USD, 1 standard lot: 100,000 × 0.0001 = $10 per pip.
- EUR/USD, 0.1 lot: 10,000 × 0.0001 = $1 per pip.
- USD/JPY, 1 standard lot at an illustrative 150.00: 100,000 × 0.01 = 1,000 yen per pip, and 1,000 ÷ 150 = about $6.67 per pip.
The pip calculator does this for crosses and gold too.
Gold uses the same logic
Gold is quoted as XAU/USD in dollars per troy ounce, and one lot is commonly 100 ounces. If the minimum step is $0.01, one step on one lot is worth $1. A $10 move on a 0.1-lot position (10 ounces) is worth $100. Check your provider's contract specification, because lot sizes for metals are not universal.
Leverage and margin in this forex trading guide
Because currencies usually move by fractions of a per cent, retail forex is normally traded with leverage. You put up a deposit called margin, and the provider lets you control a position worth many times more.
Illustrative example: you buy 0.1 lot of EUR/USD at 1.1650. The position is worth 10,000 × 1.1650 = $11,650. At 30:1, the margin is $11,650 ÷ 30 = $388.33. A 1% fall in EUR/USD costs $116.50, which is 30% of that margin. A 3.3% fall would consume almost all of it.
In the UK, EU and Australia, retail leverage on major pairs is capped at 30:1, and at 20:1 on non-major pairs and gold. US retail forex is capped at 50:1 on majors and 20:1 on others. Providers must close positions for UK and EU retail clients when the margin level reaches 50%, and those clients cannot lose more than their account balance. The margin calculator shows the numbers for your own size.
A complete trade, start to finish
Here is one illustrative trade with the numbers checked.
- Plan the risk. Account balance $5,000. You decide the most you will lose on this idea is $75.
- Pick the stop. You buy EUR/USD at 1.16490 and place a stop-loss 25 pips lower, at 1.16240.
- Size the position. $75 ÷ 25 pips = $3 per pip, which on a dollar-quoted pair means 0.3 lots (30,000 euros). The position size calculator does this step for you.
- Set a target. Take-profit 50 pips higher, at 1.16990, worth 50 × $3 = $150 before costs.
- Count the costs. The 1-pip spread costs $3 as soon as you open. If you hold past the daily 17:00 New York rollover, a financing charge or credit is applied, usually tripled on Wednesdays to cover the weekend.
If the stop is hit you lose about $75 plus costs. If the target is hit you gain about $150 minus costs. Neither outcome is predictable; the plan simply means you know the damage in advance. Price can also jump past a stop in fast markets, so the actual loss can be larger.
When the market is open
Forex runs from Sunday 17:00 to Friday 17:00 New York time, following the business day around the world: Sydney and Tokyo first, then London, then New York. Activity, and usually the tightest spreads, is greatest when London and New York overlap. Liquidity is thinnest just after the Sunday open and around public holidays. The market board on our home page shows what is open right now.
What moves exchange rates
- Interest rates and central banks. Expectations about the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan drive much of the market.
- Economic releases. Inflation, employment and growth figures are published on a calendar, and prices can move sharply in the seconds afterwards.
- Risk appetite. In periods of fear, money has often moved towards the dollar, the yen, the Swiss franc and gold, though these patterns break down regularly.
- Trade and capital flows. Companies and investors converting money for real business create steady demand for some currencies.
Spot forex, CFDs and changing money
When you buy forex for a holiday or send money abroad, you are doing a real currency exchange, and the cost is mostly hidden in the rate you are given. Our page on forex exchange covers that. Trading forex through a broker is different: you usually hold a leveraged position that is settled in cash, never taking delivery of the currency. The costs are the spread, any commission and overnight financing, all explained in trading fees explained.
Practising without real money
You can learn most of this forex trading guide on paper. Pick a pair, write down an entry, a stop-loss and a target, size the position with the calculators and then follow the price for a few days. Record what happened, including the spread you would have paid and any overnight financing. After twenty or thirty paper trades you will know far more about how prices behave than any advert can tell you.
Many providers also offer demo accounts with pretend money. They are useful for learning the platform, but remember two differences: demo fills are often smoother than real ones, and losing pretend money does not test your nerves. Treat a demo as a flight simulator, not as evidence that you are ready.
Common beginner mistakes
- Choosing a lot size first and a stop-loss second, instead of the other way round.
- Ignoring the overnight charge on positions held for weeks.
- Trading straight through a major data release with a tight stop.
- Moving a stop-loss further away because the trade is losing.
- Using a provider found through a social media message rather than a regulator's register; see how to choose a broker.
Beginner questions
How much money do I need to start learning forex?
None. You can learn quotes, pips, margin and costs with a calculator and a notebook. If you later decide to trade, only use money you could lose entirely without affecting your life.
What is the difference between buying and selling a currency pair?
Buying expects the base currency, the first in the pair, to rise against the quote currency. Selling expects it to fall. With a CFD you can sell without owning the currency first.
Why is a pip on USD/JPY not worth $10 per lot?
Because the pair is quoted in yen. One pip on a standard lot is 1,000 yen, which has to be converted into dollars at the current rate, so its dollar value changes as USD/JPY moves.
Sources
- UK Financial Conduct Authority, CFD 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 rules