Forex trading
Family X · Account mechanics
Forex trading is the act of buying and selling currency pairs in the foreign exchange market, the largest and most liquid financial market by turnover. It is an over-the-counter market, meaning trades are executed bilaterally or through intermediaries rather than on a single central exchange. Participants include banks, corporations, funds, brokers and retail traders, and the object of a trade is a change in the relative value of two currencies.
How a forex trade is quoted and sized
Every forex trade is expressed as a currency pair, such as EUR/USD, where the first currency is the base and the second is the quote currency. The quoted price states how much of the quote currency is needed to buy one unit of the base currency. A trade is long the base and short the quote when buying the pair, and the reverse when selling.
Positions are sized in lots. A standard lot is 100,000 units of the base currency, with mini, micro and nano lots at 10,000, 1,000 and 100 units respectively, though the exact contract sizes offered vary by broker and instrument. Because price moves are small, most retail forex trading uses leverage, which magnifies both gains and losses and is capped at different levels by different regulators.
Worked example: profit and loss on a long EUR/USD position
A trader buys one standard lot (100,000 EUR) of EUR/USD at 1.0850 and later sells it at 1.0900, a rise of 50 pips. Pip value is calculated in the quote currency, USD.
Costs such as the spread, commissions and any swap or rollover charge are deducted from this gross figure, so the net result is lower. The same arithmetic works in reverse for a short position, where a fall in the pair produces a profit.
Sessions, liquidity and costs
Forex trading runs continuously from the opening of the Sydney session on Monday to the close in New York on Friday. Liquidity concentrates when major financial centres overlap, most notably the London–New York overlap, and spreads are generally narrower during those periods. Outside them, spreads tend to widen and price gaps can occur.
Transaction costs take the form of the bid–ask spread, broker commissions on some account types, and swap or rollover charges when a position is held overnight. Swap rates depend on the interest rate differential between the two currencies and on the broker's markup, and they can be positive or negative. Margin requirements, leverage limits and the availability of hedging or stop-loss orders differ by jurisdiction and by broker.
Risks specific to forex
Because currency pairs are quoted in very small increments, leverage is used almost universally in retail forex trading, and it magnifies losses as readily as gains. A move against a leveraged position can exhaust the margin backing it, triggering a margin call or automatic liquidation.
Additional risks include slippage during fast markets, gaps over weekends or around scheduled data releases, and counterparty risk to the broker or liquidity provider. Exchange rates are also driven by macroeconomic factors such as interest rate decisions, inflation data, trade balances and political events, which can produce abrupt and sustained trends.
Often confused with
- Look-alikes
- None recorded for this entry yet.