Fundamentals
The vocabulary and mechanics every other lesson builds on.
What Is Forex Trading?
The foreign exchange (forex) market is where one currency is exchanged for another. Trading always happens in pairs — like EUR/USD — because you're buying one currency while simultaneously selling the other.
It's the largest and most liquid financial market in the world, with trillions of dollars changing hands daily, operating 24 hours a day on weekdays across major financial centers (Sydney, Tokyo, London, New York) as the trading day follows the sun around the globe.
Unlike a stock exchange, forex has no single central exchange — it trades over-the-counter (OTC), directly between banks, brokers, and traders through electronic networks.
Forex isn't a place — it's a 24-hour network of banks, brokers, and traders swapping currencies directly with each other.
Reading a Currency Pair
In EUR/USD, EUR is the base currency and USD is the quote currency. A price of 1.0900 means 1 euro buys 1.09 US dollars.
If the price rises, the base currency (EUR) is strengthening against the quote currency (USD); if it falls, the base currency is weakening. Going "long" EUR/USD means you're betting the euro strengthens against the dollar; going "short" means you're betting it weakens.
- Majors — pairs involving USD and a large economy's currency (EUR/USD, GBP/USD, USD/JPY): highest liquidity, tightest spreads.
- Minors (crosses) — major currencies traded against each other without USD (EUR/GBP, AUD/JPY).
- Exotics — a major currency paired with a smaller/emerging-market currency (USD/TRY, USD/ZAR): wider spreads, thinner liquidity.
The first currency in a pair is what you're trading; the second is just what you're pricing it in.
Pips & Spreads
A pip is typically the smallest standard price move in a currency pair — usually the fourth decimal place (0.0001) for most pairs, or the second decimal (0.01) for pairs involving the Japanese yen.
The spread is the gap between a broker's buy (ask) and sell (bid) price for a pair — it's effectively the built-in cost of placing a trade. The moment you open a position, you start slightly in the red by the size of the spread; tighter spreads mean lower trading costs, especially for frequent or short-term traders.
Every trade starts slightly in the red — the spread is a cost you pay before the market has even moved.
The gap between the price you can sell at (bid) and buy at (ask) is the spread — your entry cost before the trade has even moved.
Leverage & Margin
Leverage lets you control a larger position than your account balance alone would allow — for example, 1:100 leverage means a $1,000 deposit (your margin) can control a $100,000 position.
Leverage magnifies both potential profits and potential losses equally — it does not change the odds of a trade being right, only the size of the outcome either way. It's possible to lose more than your initial deposit in some account types.
If losses eat too far into your margin, a broker issues a margin call (a warning to add funds or reduce exposure) and, if equity keeps falling, a stop-out — the broker automatically closes positions to prevent the account from going negative.
Regulators in stricter jurisdictions (like the UK's FCA or the EU's ESMA rules) cap retail leverage specifically because of this risk — a high maximum leverage limit is not automatically a sign of a better broker.
Leverage doesn't change your odds of being right — it only changes how big the outcome is when you're wrong.
Try it yourself — drag the sliders and watch how fast leverage turns a small move into a large one.
Check yourself: Fundamentals
Why does forex trading always happen in pairs, like EUR/USD?