Short answer: Forex trading is buying one currency while selling another, betting that the exchange rate between them will move your way. Retail traders do it through a broker, usually with borrowed money (leverage), so small price moves turn into large gains or losses on the money in the account.
This guide covers the mechanics you need before opening an account: how pairs are quoted, what pips and lots are worth in dollars, how leverage and margin work, how brokers make their money, and where most new traders lose theirs.
How the forex market works
Currencies trade over the counter. There's no single central exchange. Banks, funds, companies and retail brokers deal with each other electronically, and the market runs 24 hours a day from Sunday evening to Friday evening (New York time), handing the business day from Sydney to Tokyo to London to New York.
It's the largest financial market in the world. The Bank for International Settlements put average turnover at $9.6 trillion a day in its April 2025 survey. That depth is why major pairs like EUR/USD have tight spreads: there's always someone on the other side.
As a retail trader you're almost never buying physical currency. You're trading a CFD (contract for difference) or a spot contract with your broker. You make or lose money on the price change. No euros arrive in your bank.
Currency pairs: base and quote
Every forex price is a pair. In EUR/USD 1.0850:
- EUR is the base currency.
- USD is the quote currency.
- 1.0850 means one euro costs 1.0850 US dollars.
Buy (go long) EUR/USD and you profit if the euro strengthens against the dollar. Sell (go short) and you profit if it weakens. Going short is as easy as going long, which is one of the big differences from buying shares.
Pairs fall into three groups:
| Group | Examples | Typical spread | Notes |
|---|---|---|---|
| Majors | EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, NZD/USD | Lowest | Most liquid, include USD |
| Crosses (minors) | EUR/GBP, EUR/JPY, GBP/JPY, AUD/NZD | Wider | No USD |
| Exotics | USD/INR, USD/ZAR, USD/TRY, USD/MXN | Widest | Lower liquidity, bigger gaps |
Most brokers also list gold (XAU/USD) and silver next to the currencies. Plenty of traders treat gold as just another pair.
Pips: how price moves are counted
A pip is the standard unit of price movement.
- For most pairs it's the 4th decimal place: 0.0001. EUR/USD going from 1.0850 to 1.0870 is a 20-pip move.
- For yen pairs it's the 2nd decimal place: 0.01. USD/JPY going from 150.00 to 150.50 is 50 pips.
Brokers quote an extra digit (1.08505), called a pipette or fractional pip. Ten pipettes make one pip.
Lots: how position size is measured
Position size is measured in lots:
| Lot type | Units of base currency | Pip value on EUR/USD |
|---|---|---|
| Standard lot (1.00) | 100,000 | $10 |
| Mini lot (0.10) | 10,000 | $1 |
| Micro lot (0.01) | 1,000 | $0.10 |
So that 20-pip EUR/USD move is worth $200 on a standard lot, $20 on a mini lot and $2 on a micro lot.
When the dollar isn't the quote currency, pip value moves with the price. One standard lot of USD/JPY at 150.00 is worth about $6.67 a pip (100,000 x 0.01 / 150). Don't do this by hand. Use our pip value calculator, and the lot size calculator to size trades from your stop-loss and risk per trade.
Leverage and margin
Leverage lets you control a position much bigger than your deposit. The broker asks you to set aside a slice of the position's value as margin and effectively lends you the rest.
Margin = position value / leverage
One standard lot of EUR/USD at 1.0850 is a $108,500 position. Margin needed:
| Leverage | Margin for 1 standard lot EUR/USD |
|---|---|
| 1:30 (EU/UK retail cap) | $3,616.67 |
| 1:100 | $1,085 |
| 1:500 | $217 |
| 1:1000 | $108.50 |
This is the part people get backwards. Higher leverage doesn't change what a pip is worth. It only changes how much of your balance is locked up as margin, which means it lets you open bigger positions relative to your account. A 20-pip move is still $200 on one lot. On a $500 account that's 40% of your money, at 1:30 or 1:1000.
If losses eat your free margin, the broker sends a margin call, and at its stop-out level it starts closing your positions for you. We walk through the maths with worked examples in forex leverage explained.
How forex brokers make money
Knowing this tells you where your costs sit and where the broker's incentives sit.
- Spread. The gap between the buy (ask) and sell (bid) price. A 1.0-pip spread on EUR/USD costs $10 per standard lot the moment you open.
- Commission. "Raw" or ECN accounts quote tighter spreads and charge a fixed commission per lot instead. IC Markets' Raw Spread account on MetaTrader, for example, averages 0.1 pips plus $7 round-turn per lot.
- Swap (overnight financing). Hold a position past the daily rollover and you pay or earn interest, depending on the two currencies' rates. Swap-free (Islamic) accounts replace this with other fees, or none.
- Taking the other side. Many brokers act as market maker on some or all client trades. When most clients lose, the broker keeps those losses. It's legal and common. It's also why you should care how a broker treats clients who win.
- Other fees. Inactivity fees, currency conversion and some withdrawal fees. NordFX, for instance, charges 4% on India bank/IMPS withdrawals.
Spreads get most of the attention in broker reviews. They're rarely what hurts a retail trader most. A broker that delays or refuses a withdrawal costs more than years of spreads, which is why our Verdict Score weights payout reliability at 35% and doesn't score costs at all.
Who you trade with matters more than the pair
The broker holds your money. Before depositing, check:
- Licence tier. A Tier 1 regulator (FCA, ASIC and similar) is stronger protection than an offshore registration. Many groups hold both and put international clients in the offshore entity, so check which entity your account opens with.
- Withdrawals. How fast, by which methods, and whether recent clients report refused withdrawals or cancelled profits.
- Platforms and leverage. Whether you get MT4, MT5, cTrader or TradingView, and the leverage your entity actually offers.
The three highest-scoring brokers in our current rankings. None carries a complaint flag from our review scan:
| Broker | Verdict | Payout | Best licence | Max leverage | Min deposit |
|---|---|---|---|---|---|
| Exness | 9.9 | 9.6 | Tier 1 | Unlimited | $10 |
| IC Markets | 9.8 | 9.5 | Tier 1 | 1:5000 | $0 |
| FP Markets | 9.2 | 9.8 | Tier 1 | 1:500 | Not published |
Our full checklist is in how to choose a forex broker, and country lists start at best forex brokers in the UK and the UAE.
The risks
- Leverage cuts both ways. At 1:500, a 1% move against your full position wipes out five times your margin. Most blown accounts are over-sized positions, not bad analysis.
- Gaps and slippage. Prices can jump straight over your stop-loss on news or at the weekend open, so you can lose more than you planned.
- Broker risk. An unregulated or offshore-only broker may not pay out, and you may have no regulator to complain to.
- Costs add up. Trade often and you pay the spread every time. Hold for weeks and you pay swaps.
- Most retail traders lose. EU and UK regulated CFD brokers have to publish the share of retail accounts that lose money. It's consistently the majority.
Before trading live, run a planned trade through the forex profit calculator so you know what a stop-loss hit costs in dollars.
How to start
- Learn pips, lots and margin until you can size a trade without a calculator.
- Pick a regulated broker with a record of paying withdrawals.
- Practise on a demo account, then go live small (micro lots).
- Risk a fixed, small share of the account per trade. Always use a stop-loss.
- Test a withdrawal early, before your balance is large.
FAQ
Is forex trading legal?
In most countries, yes, through a broker licensed by the local regulator. Some countries restrict it: retail traders may be limited to local exchanges or certain currency pairs, or leverage may be capped. Check the rules where you live before opening an account with a foreign broker.
How much money do I need to start forex trading?
Many brokers accept $10 or less (Exness starts at $10, IC Markets at $0), and micro lots let you trade at $1 per 10 pips on EUR/USD. A small account is fine for learning, but with very little capital any meaningful position size means high leverage and high risk.
Can you get rich trading forex?
Some traders make consistent profits. Most retail accounts lose money. Treat it as high-risk and only trade money you can afford to lose.
What is the best currency pair for beginners?
EUR/USD, usually: tightest spreads, most liquidity, steady price action. Leave exotics alone until you understand how wide spreads and gaps affect you.
What is the difference between forex and CFDs?
Retail "forex trading" is usually done through CFDs or rolling spot contracts. You trade the price change without taking delivery of the currency. The same broker account usually offers CFDs on gold, indices, oil and crypto as well.
When is the forex market open?
Sunday evening to Friday evening New York time, 24 hours a day. Volume and volatility peak when the London and New York sessions overlap.
CFDs are leveraged products; most retail accounts lose money.