Trading forex
Family X · Account mechanics
Not to be confused with spread in trading forex, forex, forex trading.
Trading forex means buying one currency while simultaneously selling another, because every currency pair expresses the price of one unit of the base currency in terms of the quote currency. It takes place mainly over the counter between banks, brokers and electronic venues rather than on a single central exchange, and it is the largest market by daily turnover. A position is opened at one rate and closed at another; the difference, after any fees or financing charges, is the result.
How a forex trade is structured
A forex trade is always a pair, such as EUR/USD or USD/JPY. The first currency is the base and the second is the quote. A quote of 1.0850 for EUR/USD means one euro costs 1.0850 US dollars.
Buying the pair means buying euros and selling dollars; selling the pair means the reverse. Because currencies are traded in pairs, a view on one currency is always expressed against another, and the trader is exposed to both sides of the pair.
Positions are usually leveraged, meaning a trader controls a larger notional amount than the margin deposited. Leverage magnifies both gains and losses, and the maximum available leverage varies by jurisdiction, broker and account type.
Worked example
A trader buys 10,000 euros against the US dollar at 1.0850 and later sells at 1.0900.
The result is in the quote currency, US dollars, because the euro is the base. Spread, commission and any overnight financing are deducted from this gross figure, so the net result depends on the costs charged by the venue used.
Costs and mechanics that vary
- Spread: the difference between the bid and the ask, which is the primary cost on most retail accounts.
- Commission: a separate per-trade charge on some account types, often paired with a narrower spread.
- Swap or rollover: a financing adjustment applied when a position is held past the daily rollover point, which can be positive or negative depending on the interest-rate differential.
- Session hours: the market runs continuously from the start of the trading week in Asia to the close in New York, but liquidity and spreads differ greatly between sessions.
Contract sizes, minimum trade sizes, margin requirements and available leverage are set by the broker and constrained by the regulator in the trader's jurisdiction, so they are not uniform across the market.
What moves forex rates
Exchange rates respond to interest-rate decisions, inflation data, employment figures, trade balances and political events, as well as to capital flows between countries. Because two currencies are involved, a move in a pair can come from news affecting either side.
Most forex trading is not driven by a need to exchange money for goods or travel but by speculation, hedging and portfolio allocation. That concentration of speculative flow is one reason short-term price moves can be sharp and why risk management, position sizing and an understanding of leverage are central to the activity.
Often confused with
- spread in trading forex
- The spread in trading forex is the difference between the bid price and the ask price quoted for a currency pair, representing the cost of entering a position immediately at market.
- forex
- Forex is the global over-the-counter market where national currencies are exchanged in pairs, with prices quoted as the amount of one currency required to buy another.
- forex trading
- Forex trading is the exchange of one national currency for another at an agreed rate, conducted in an over-the-counter global market where prices are quoted in currency pairs and positions are typically closed or rolled over without physical delivery.