Forex Trading Basics

The foreign exchange (forex or FX) market is where currencies are traded. It is the largest, most liquid financial market in the world, with major pairs like EUR/USD and USD/JPY trading around the clock during the business week.

This page covers forex basics: how currency pairs are quoted, what drives exchange rates, how retail forex trading works and the key risks that make FX trading challenging for many beginners.

Currency pairs and quotes

Currencies are quoted in pairs, such as EUR/USD (euro vs. U.S. dollar). The first currency is the base currency and the second is the quote currency. A EUR/USD quote of 1.10 means one euro is worth 1.10 U.S. dollars.

Common categories of pairs include:

• Majors: heavily traded pairs involving the U.S. dollar (EUR/USD, USD/JPY, GBP/USD).
• Minors: pairs that do not include the dollar (EUR/GBP, EUR/JPY, GBP/JPY).
• Exotics: pairs involving emerging-market currencies, such as USD/TRY or USD/ZAR.

What moves exchange rates?

Exchange rates are influenced by many factors, including:

• Interest-rate expectations set by central banks.
• Inflation trends and economic growth.
• Political stability and geopolitical events.
• Market sentiment and risk appetite.

Major announcements such as interest-rate decisions, employment reports and inflation releases can lead to sharp, fast moves in currency pairs.

How retail forex trading works

Many individual traders access forex through online brokers or CFD (contract-for-difference) providers. These platforms often offer:

• High leverage, sometimes far greater than in stock trading.
• Tight spreads on major pairs, wider spreads on minors and exotics.
• 24-hour trading during the week, split across global sessions.

Leverage means you can control a large position with relatively little capital, but it also means that losses can accumulate quickly if the market moves against you.

Risks in forex trading

Forex trading carries several specific risks:

• Leverage risk: small price moves can have a big impact on account equity.
• Gap and news risk: markets can jump during or after important announcements.
• Counterparty risk: the reliability of the broker or platform you use.
• Psychological pressure: fast markets and constant price changes can be stressful.

Because of this, many educators recommend that beginners start with low leverage, focus on risk management and treat forex as a high-risk segment of an overall portfolio—if they participate at all.

Forex and other markets

Forex does not exist in isolation. Currency trends are closely tied to:

• Central bank policy and bond yields.
• Commodity prices (for example, currencies of resource-exporting countries).
• Equity market sentiment and global risk-on/risk-off moves.

Some traders use forex to express views on macroeconomic themes, while others focus mainly on technical chart patterns and price action.

Is forex trading right for you?

Forex may appeal to traders who:

• Enjoy following global economic news.
• Can commit time to learning risk management and position sizing.
• Are comfortable with the idea of high volatility and potential losses.

For many long-term investors, however, it may be more practical to focus on diversified stock and bond portfolios, using currency exposure primarily through international funds or ETFs rather than leveraged forex trading.

To see how forex compares with other opportunities, you can also read about futures, options, day trading and mutual funds.