What Is Forex? A Plain-English Guide to Currency Trading
Eight years on an FX trading desk taught me one thing most beginners miss: forex is not a single exchange like the NYSE. There’s no central building, no opening bell. It’s a decentralised network of banks, institutions, and retail traders all quoting prices at the same time. You’re trading inside that network.
That reality changes how you approach the market. Here’s what you actually need to know.
How the Forex Market Works
At the top level, the biggest banks (Deutsche Bank, JPMorgan, Citi) quote prices to each other through an interbank network. Below them sit smaller banks, hedge funds, and institutional traders. At the bottom of that chain: retail brokers who aggregate those prices and offer them to individual traders.
When you buy EUR/USD on Exness, you’re not trading directly against another retail trader. You’re accessing a price feed that flows down from interbank rates, with a small spread added by the broker.
Volume by session:
- London session: accounts for around 35% of daily volume (highest liquidity)
- New York session: 17%, but overlaps with London 13:00–17:00 UTC for peak volatility
- Tokyo/Sydney session: lower volume, tighter ranges, favoured by carry traders
I spent most of my desk time in London hours. The first 15 minutes after the London open are deceptive: spreads spike, stop hunts happen. On the desk, we never put on new positions in that window. Beginners treat 09:00 UTC as a signal. Veterans treat it as noise.
Currency Pairs: The Basic Building Block
Every forex trade involves two currencies. You buy one and sell the other simultaneously.
- Major pairs: EUR/USD, GBP/USD, USD/JPY, USD/CHF — tightest spreads, highest volume
- Minor pairs: EUR/GBP, AUD/CAD, GBP/JPY: less volume, slightly wider spreads
- Exotic pairs: USD/TRY, USD/ZAR: wide spreads, higher volatility, lower liquidity
The number quoted is the price of the base currency (first) in terms of the quote currency (second). EUR/USD at 1.0850 means one euro buys 1.0850 US dollars.
A pip is the smallest standard price movement: 0.0001 for most pairs. On EUR/USD with a 0.01 lot position (mini lot), one pip equals about $0.10. On a 1.0 standard lot, one pip equals $10.00.
Who Actually Moves the Market
Retail traders (you and me) represent a tiny fraction of daily volume. The real price-movers:
- Central banks: ECB, Fed, BoE rate decisions create the largest multi-day moves
- Commercial banks: executing client currency conversions (importers, exporters)
- Hedge funds: macro bets on currency direction, often held for weeks or months
- Algorithmic traders: market-making systems that absorb small retail orders
After 8 years watching institutional flow, I can tell you retail entries are usually backwards. When retail is net long EUR/USD based on aggregated positioning data (visible via COT reports), the market often reverses. Not always. But enough to be worth tracking.
This isn’t a conspiracy. It’s mechanics. Institutions need liquidity to exit large positions. Retail stop clusters provide that liquidity.
Forex vs Stocks: What’s Different
| Feature | Forex | Stocks |
|---|---|---|
| Market hours | 24h/5d | Exchange-specific (6.5h/day) |
| Leverage available | Up to 1:500 (broker dependent) | Typically 1:4 (US) |
| Central exchange | No (decentralised) | Yes (NYSE, NASDAQ, etc.) |
| Number of instruments | ~180 pairs (majors, minors, exotics) | Thousands of individual stocks |
| Short selling | Always available (you sell the base) | Restricted or requires margin |
| Minimum capital needed | From $1 (micro accounts) | Varies by broker/country |
The leverage difference is significant. A 1:500 leverage means a $1 move against you on a 1.0 lot EUR/USD trade costs $10. On 0.01 lot (mini), it costs $0.10. Leverage is why small accounts can trade. It’s also why they blow up. More on that in the mistakes section. Worth noting: US-based traders face a much tighter ceiling — CFTC rules cap retail forex leverage at 50:1 on majors and 20:1 on minors, the strictest regime in the world, and only five brokers serve US retail accounts. The full landscape is covered in our best forex brokers for US traders guide.
How Retail Forex Trading Works in Practice
The mechanics are straightforward: open an account with a regulated broker, deposit capital, place a buy or sell order on a pair. The broker routes it through their liquidity network — you never touch the interbank market directly.
Three account types dominate retail:
- Standard accounts: spread-based pricing. No separate commission. Exness Standard runs 0.9–1.3 pips on EUR/USD during London session in my testing.
- Raw spread / ECN accounts: near-zero spread (0.0–0.2 pips) plus a fixed commission per lot (typically $3–7 per standard lot round-trip). Better for high-frequency strategies.
- Cent accounts: position sizes 100x smaller than micro. Useful for testing strategies without risking meaningful capital. Not offered by all brokers.
Ran this comparison across 4 years of EUR/USD data: the average retail trader on a standard account pays roughly $12–15 per round-trip on a 1.0 lot trade (spread + swap). On an ECN account, that drops to $7–9. The math compounds over hundreds of trades.
On a $600 Exness account, the right position size for 2% risk per trade on EUR/USD is 0.02 lots (assuming a 30-pip stop loss). That gives you 50+ trades before a total loss event, enough runway to learn whether your strategy has edge.
Entry levels, stop losses, and lot sizes. Updated every trading day. Join free.
How Forex Profits and Losses Work
You profit when the currency you bought rises in value against the one you sold. You lose when it moves against you.
Simple example: you buy 1.0 lot EUR/USD at 1.0850. The price moves to 1.0880, a 30-pip gain. At $10 per pip (standard lot), that’s $300. If it drops to 1.0820 instead, you lose $300.
Swap (rollover): if you hold a position past 17:00 New York time, you pay or receive an interest rate differential between the two currencies. Long EUR/USD when EU rates exceed US rates: you receive swap. Long USD/EUR when the reverse is true: you pay. Swap can eat into weekly returns on held positions. Check your broker’s swap table before holding any position overnight.
Margin: the deposit held by your broker as collateral for your open position. At 1:100 leverage, a 1.0 lot EUR/USD position (~$100,000 notional) requires $1,000 margin. If your account drops below the margin requirement, the broker closes your position automatically (margin call / stop out).
Getting Started: The Practical Steps
- Choose a regulated broker. Regulation matters more than spreads. FCA (UK), ASIC (Australia), CySEC (EU) are the standards worth trusting. For more detail, read our forex broker regulation guide.
- Open a demo account first. Trade with virtual capital for at least 2–4 weeks. Understand execution, platform, and your own reactions. See how to start forex trading for a full walkthrough.
- Learn one strategy before anything else. New traders scatter. Pick one setup (London breakout, trend-following on 4H, support/resistance levels) and test it until you understand why it works and when it doesn’t. Our forex trading for beginners guide covers the starting strategies worth learning.
- Start with $150–$600 live capital. $150 gets you in the game with 0.01 lots and proper risk management. $600 is the level where you can trade 0.03 lots and compound results meaningfully.
- Track every trade. Win rate, average R:R, best and worst setups. No journal means no improvement. Just gambling with more experience.
Common Mistakes to Avoid
Overleveraging from day one. This kills more new accounts than any other factor. A 30-pip stop on EUR/USD with a 1.0 lot position is a $300 loss. Most beginners don’t do that math until the account is gone.
Trading all pairs at once. Every pair has its own character. EUR/USD behaves differently from GBP/JPY. Spreading across five pairs at once multiplies exposure without multiplying edge.
Ignoring the economic calendar. The spread on EUR/USD spikes to 3–5+ pips ahead of major releases (NFP, CPI, rate decisions). I’ve seen stops triggered purely by spread widening during news events, not by price moving against the position. Check the calendar before any trade.
Treating demo performance as predictive. Demo accounts have no emotional stakes. You’ll take risks on demo that you won’t take live. Demo is for learning mechanics, not for testing how you’ll behave under pressure.
Holding losing trades and closing winners early. The classic beginner pattern. It feels rational. Statistically, it produces a negative expectancy. You’re cutting your R:R before the market proves you wrong.
What to Read Next
New to forex? Start with forex trading for beginners. It goes deeper on strategy selection and risk management. Once you understand the basics, the CFD trading guide explains the product structure behind most retail broker accounts and why execution works the way it does.
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Reader Reviews
The session breakdown explained why my EUR/USD trades worked better in the afternoon than in the opening hour. I had been entering at 09:00 UTC where spreads are wide and stop hunts are frequent, then wondering why my setups were failing. Shifting to the London-New York overlap window fixed the problem without changing anything else about my entries.
The standard versus ECN account breakdown with actual cost figures is the first version of this comparison I have seen that doesn't function as a sales pitch. I ran the numbers against my own history: 40 trades per month at 0.1 lots on EUR/USD. On a standard account at 1.1 pips spread, total monthly spread cost was $44. On an ECN account at 0.1 pips plus $3.50 commission per lot, it came to $18. At my trading frequency, switching to ECN saves $26 per month, which is meaningful on a $500 account. The break-even analysis in the article is what finally made me switch after two years on a standard account.
The note about demo performance not being predictive is more important than it looks. I ran three months of demo with a 71% win rate, then went live and immediately started breaking my own rules. The emotional gap is real and this article names it plainly without pretending it can be solved in advance.
The margin and leverage section explained something I needed to understand before my first live account rather than six months after blowing it. The worked example showing $1,000 margin for a 1.0 lot EUR/USD position at 1:100 leverage made the math concrete in a way abstract percentage explanations never did. I had been using 1:100 leverage and thinking I was being conservative without realising my position size was 10x too large for my account balance. Ran 0.01 lots for the first two months after reading this. Account finished the second month up 6.4% - the first positive month after losing three small accounts in a year.
The pip calculation section gave me a formula I apply before every entry now. On a 0.02 lot EUR/USD position with a 30-pip stop, risk is $6. On a $300 account that is 2%, exactly the per-trade limit the article recommends. Running this calculation before each trade takes 30 seconds and stopped me from accidentally putting on positions where I was risking 8-10% at once.
The warning about spreads widening to 3-5 pips before major news releases was something I learned the hard way before finding this article. My stop was triggered two pips from entry during an NFP release, not because price moved against me but because the spread jumped. Checking the economic calendar before every session is now a fixed part of my prep.
The COT report reference was new information for me. I had been long EUR/USD for two weeks based on momentum while large speculators were building net short positions according to the weekly COT data - the trade reversed within 4 days. Adding COT as a directional filter has since kept me out of several situations where retail sentiment and institutional positioning were clearly diverging.
The two mistakes section described what killed my first three accounts in sequence: overleveraging from day one and holding losing trades too long. On my first account I was trading 0.5 lots on a $300 balance, which put $50 at risk on a 10-pip stop, roughly 16% per trade. The article's worked example of 0.02 lots on $600 with a 30-pip stop comes to $12 risk, or 2% per trade. That difference is the entire gap between an account that survives long enough to learn and one that disappears inside two weeks. My current account has run 4 months at 0.02-0.03 lots and finished last month up 7.1%.
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Forex Analyst & Senior Trader
Former FX desk trader with 8 years of experience in forex and crypto markets. Expert in multi-timeframe analysis, institutional order flow, and macroeconomic fundamentals.