The foreign exchange market is the largest financial market in the world, with trillions of dollars changing hands every trading day. Yet the basic idea is simple: you are always buying one currency and selling another at the same time. This guide walks through the building blocks you need before placing your first trade.
Base and quote currencies
Every forex price is quoted as a pair, such as EUR/USD. The first currency (EUR) is the base, and the second (USD) is the quote. A price of 1.0850 means one euro costs 1.0850 US dollars. If you think the euro will strengthen against the dollar, you buy the pair. If you think it will weaken, you sell it.
Majors, minors and exotics
- Majors pair the US dollar with another leading currency, such as EUR/USD, GBP/USD and USD/JPY. They are usually the most liquid, with the tightest spreads.
- Minors (or crosses) pair two major currencies without the US dollar, such as EUR/GBP or AUD/JPY.
- Exotics pair a major currency with one from an emerging economy, such as USD/TRY. They often have wider spreads and can move sharply.
Pips, lots and spreads
A pip is the standard unit of price movement. For most pairs it is the fourth decimal place (0.0001). For pairs involving the Japanese yen it is the second decimal place (0.01). Position size is measured in lots: a standard lot is 100,000 units of the base currency, a mini lot is 10,000 and a micro lot is 1,000. On MetaTrader 5 you can trade from 0.01 lots, which makes it easier to keep position sizes small while you learn.
The spread is the difference between the buy (ask) and sell (bid) price. It is one of the main costs of trading, so tight spreads matter, especially if you trade often.
What moves currency prices?
- Interest rate decisions and guidance from central banks
- Economic data such as inflation, employment and growth figures
- Political events and changes in global risk sentiment
- Trade flows and commodity prices for commodity-linked currencies
Leverage cuts both ways
Leverage lets you control a large position with a smaller deposit, called margin. It magnifies gains, but it magnifies losses by exactly the same amount. Many new traders lose money because they use too much leverage. Start small, and treat leverage as a tool to manage carefully, not a target to maximise.
Your next steps
Open a demo account and practise placing trades, setting stop-losses and reading charts without risking real money. When you move to a live account, begin with micro lots and a written trading plan.
This article is for general education only and is not investment advice. Trading forex and CFDs carries a high risk of losing money.