Forex (foreign exchange) trading is the buying and selling of currencies to make a profit. It's the largest financial market in the world, with over $6.6 trillion traded daily. Unlike stocks, forex trades 24 hours a day, 5 days a week, making it accessible to traders worldwide.
How Does Forex Trading Work?
In forex, you always trade currencies in pairs. When you buy one currency, you simultaneously sell another. The first currency is called the "base currency" and the second is the "quote currency."
Example: EUR/USD = 1.0850
This means 1 Euro equals 1.0850 US Dollars. If you believe the Euro will strengthen against the Dollar, you BUY EUR/USD. If you think it will weaken, you SELL.
Key Forex Terms You Need to Know
Pip (Percentage in Point)
A pip is the smallest price movement in forex. For most currency pairs, it's the fourth decimal place (0.0001). If EUR/USD moves from 1.0850 to 1.0851, that's a 1 pip movement.
Lot Size
A "lot" is the standard unit of measurement in forex:
- Standard Lot: 100,000 units (1 pip = $10)
- Mini Lot: 10,000 units (1 pip = $1)
- Micro Lot: 1,000 units (1 pip = $0.10)
Leverage
Leverage allows you to control a large position with a small amount of money. With 1:100 leverage, $100 can control $10,000 worth of currency. While this amplifies profits, it also amplifies losses.
Important Warning
Leverage is a double-edged sword. While it can multiply your gains, it can also multiply your losses. Always use proper risk management and never risk more than 1-2% of your account on a single trade.
Spread
The spread is the difference between the buy (ask) and sell (bid) price. This is how brokers make money. Lower spreads mean lower trading costs for you.
Major Currency Pairs
The most traded currency pairs are called "majors" and include:
- EUR/USD - Euro/US Dollar (most traded pair)
- GBP/USD - British Pound/US Dollar
- USD/JPY - US Dollar/Japanese Yen
- USD/CHF - US Dollar/Swiss Franc
- AUD/USD - Australian Dollar/US Dollar
- USD/CAD - US Dollar/Canadian Dollar
How to Start Trading Forex
Step 1: Learn the Basics
Before risking real money, understand how the market works. Study technical and fundamental analysis, and practice on a demo account.
Step 2: Choose a Regulated Broker
Select a broker regulated by reputable authorities like the FCA, ASIC, or CySEC. Check our best forex brokers guide for recommendations.
Step 3: Start with a Demo Account
Practice trading with virtual money until you're consistently profitable. Most brokers offer free demo accounts with real market conditions.
Step 4: Fund Your Account
Start small - you can begin with as little as $100-$500. Only trade money you can afford to lose.
Step 5: Develop a Trading Plan
Define your strategy, risk management rules, and trading schedule. Stick to your plan and avoid emotional decisions.
Best Times to Trade Forex
The forex market operates through four major sessions:
- Sydney Session: 10:00 PM - 7:00 AM GMT
- Tokyo Session: 12:00 AM - 9:00 AM GMT
- London Session: 8:00 AM - 5:00 PM GMT (highest volume)
- New York Session: 1:00 PM - 10:00 PM GMT
The best trading opportunities occur during session overlaps, especially London/New York (1:00 PM - 5:00 PM GMT).
Common Mistakes to Avoid
- Overtrading: Taking too many trades without proper analysis
- No Stop Loss: Always protect your trades with a stop loss
- Risking Too Much: Never risk more than 1-2% per trade
- Revenge Trading: Don't try to recover losses with bigger trades
- Ignoring News: Economic events can cause major price swings
Ready to Start Trading?
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