Currency Trading (Forex) Basics Explained

Tap a term to see what it means.

Currency Pairs

Forex trading always involves exchanging one currency for another, expressed as a pair (such as EUR/USD), where the price shows how much of the second currency is needed to buy one unit of the first.

Pip

The smallest standardized price movement in a currency pair, typically the fourth decimal place, used to measure and communicate small changes in exchange rates.

Leverage

Forex trading commonly involves borrowing funds to control a much larger position than one's actual capital, which can amplify both potential gains and potential losses significantly.

Bid-Ask Spread

The difference between the price at which a currency can be bought (ask) and sold (bid) at a given moment, which represents a cost built into every forex transaction.

Market Participants

The forex market includes central banks, large commercial banks, multinational corporations hedging currency risk, institutional investors, and individual retail traders, operating together in a decentralized, 24-hour global market.

Market Hours

Unlike stock exchanges, the forex market operates nearly 24 hours a day on weekdays, as trading shifts between major financial centers in Asia, Europe, and North America as each region's business day begins.

The world's largest financial market

The foreign exchange market is by far the largest financial market in the world by trading volume, with trillions of dollars changing hands daily β€” far exceeding the volume of global stock markets combined, largely because currency conversion underlies nearly all cross-border trade and investment.

Frequently Asked Questions

Is retail forex trading risky for individual investors?

Yes β€” the common use of high leverage in forex trading means that losses can accumulate quickly and can sometimes exceed an initial investment, which is why it is generally considered a higher-risk activity than many other forms of investing.

Why does the forex market never fully close during the trading week?

Because major financial centers around the world are located in different time zones, as one major market closes for the day, another is opening elsewhere, allowing continuous trading throughout the business week.