Trading Basics
Learn what forex trading is, how the markets work, and the key terms every beginner needs to know — explained in plain English.
What Is Forex Trading?
Forex (foreign exchange) trading is the act of buying one currency while selling another at the same time. You do this because you expect one currency to go up in value compared to the other. Currencies are always traded in pairs, like EUR/USD (euro vs US dollar) or GBP/JPY (British pound vs Japanese yen).
When you buy EUR/USD, you are buying euros and selling dollars. If the euro goes up in value, you make a profit. If it goes down, you make a loss. Every trade is simply a bet on whether one currency will get stronger or weaker compared to another.
How The Market Works
The forex market is the biggest financial market in the world. It is open 24 hours a day, Monday to Friday, because trading happens across different time zones — starting in Sydney, then Tokyo, London, and finally New York. There is no central building like a stock exchange. Everything happens electronically between banks, brokers, and traders.
Prices move because of supply and demand. When more people want to buy a currency, its price goes up. When more people want to sell, its price goes down. News events, economic reports, and even rumors can cause prices to move quickly.
Bid and Ask Price
Every currency pair has two prices: the bid (what you can sell at) and the ask (what you can buy at). The bid is always slightly lower than the ask. The difference between them is called the spread.
For example, if EUR/USD has a bid of 1.1050 and an ask of 1.1052, the spread is 2 pips. The spread is how your broker or prop firm makes money — you pay it every time you open a trade.
What Are Pips?
A pip (percentage in point) is the smallest price movement in most currency pairs. For most pairs, a pip is 0.0001. So if EUR/USD moves from 1.1050 to 1.1060, that is a 10 pip move. Pips are how traders measure how much a price has moved and how much profit or loss they have made.
What Are Lots?
Currencies are traded in units called lots. A standard lot is 100,000 units of currency. A mini lot is 10,000 units. A micro lot is 1,000 units. The bigger your lot size, the more each pip movement is worth in profit or loss.
- Standard lot: 1 pip = $10
- Mini lot: 1 pip = $1
- Micro lot: 1 pip = $0.10
What Is Leverage?
Leverage is borrowed money that allows you to control a large position with a small amount of your own money. For example, with 1:100 leverage, you can control $100,000 worth of currency with only $1,000 of your own funds.
Leverage magnifies both profits and losses. If you make a 1% gain on a leveraged position, that could be a 100% return on your own money. But if you lose 1%, it could wipe out your entire investment. This is why leverage is powerful but must be used carefully.
Key Takeaway
The most important thing as a beginner is to understand the basics — pips, lots, and leverage — before placing your first trade. Start with small position sizes and never use maximum leverage. The goal is to learn how prices move without losing your capital.