Trade forex
Family I · Instruments
Not to be confused with trade size, trade, cfd trade.
Trade forex is the activity of exchanging one currency for another at an agreed rate, with the aim of profiting from changes in that rate. It takes place in the foreign exchange market, which is decentralised and operates continuously during the trading week. Participants include banks, corporations, governments and retail traders, and the instruments used are currency pairs such as EUR/USD.
How a forex trade works
A forex trade always involves two currencies: a base currency and a quote currency. The quoted price states how much of the quote currency is needed to buy one unit of the base currency. For example, if EUR/USD is quoted at 1.1000, one euro costs 1.10 US dollars.
Traders take a long position if they expect the base currency to strengthen against the quote currency, or a short position if they expect it to weaken. Profit or loss is determined by the difference between the opening and closing rates, multiplied by the position size.
Worked example
This example ignores transaction costs, which vary by broker and market conditions.
Key features
- Over-the-counter market: There is no single exchange; trading occurs between parties via electronic networks.
- Leverage: Retail forex trades are often leveraged, meaning a small deposit controls a larger position. The maximum leverage available varies by jurisdiction and broker.
- Liquidity: Major currency pairs tend to be highly liquid, but liquidity varies by pair and time of day.
- Costs: Costs include spreads, commissions and overnight financing charges, which differ between providers.
Distinction from other terms
See the separate entries for trade size, trade and cfd trade.
Often confused with
- trade size
- Trade size is the quantity of an asset in a single transaction, whereas trade forex is the activity of trading currency pairs; the former is a number, the latter is an action.
- trade
- A trade is any single purchase or sale of a financial instrument, while trade forex specifically refers to transactions in the foreign exchange market; the visible sign is the mention of currency pairs.
- cfd trade
- A cfd trade is a contract for difference that may reference currencies but does not involve owning the underlying, whereas trade forex can involve spot, forward or swap transactions; the visible sign is the presence of a contract specification.