Forex Trading for Beginners

What the forex market is

Forex is short for foreign exchange. It is the market where one currency is exchanged for another. Banks, companies, funds and individuals all use it. A company that sells goods abroad may need to swap money. A trader swaps money because they think one currency will move against another.

There is no single building for it. Trading runs through networks of banks and brokers, and it is open on weekdays across the world's time zones. What you can trade, what you pay and how orders are filled all vary by broker, so check the terms of the one you use. This page names none.

Pairs: base and quote

Currencies are quoted in pairs, such as EUR/USD. The first currency is the base. The second is the quote. A price of 1.1000 for EUR/USD means one euro costs 1.1000 US dollars. If you buy the pair, you buy the base and sell the quote. If you sell the pair, you do the reverse.

A rising price means the base got stronger against the quote. It does not say why or what comes next. The numbers on this page are made up and do not describe any real price.

Pips and lots

A pip is the standard small step in a price. For most pairs it is the fourth decimal place, 0.0001. Some pairs that involve the yen use the second decimal place, 0.01.

A lot is the size of the trade. By convention:

• 1.00 lot (standard) is 100,000 units of the base currency.
• 0.10 lot (mini) is 10,000 units.
• 0.01 lot (micro) is 1,000 units.

Pip value is the money one pip is worth at your size. When the quote currency is your account currency, it is simple.

When the quote currency is not your account currency, the value must be converted. The pip value calculator does the sum, and the lot size calculator turns a chosen risk into a size.

Leverage and margin

Leverage means you control a position larger than the money you put up. The money set aside to hold the position open is called margin. It is not a fee. It is a deposit that stays tied up while the trade is open.

In our made-up example the leverage is 30 to 1. The position is 10000 units at 1.1001, so its value is 10000 x 1.1001 = $11001.00. The margin needed is $11001.00 / 30 = $366.70. On a $1000 account that leaves $633.30 free.

Notice what leverage does not change. Each pip is still worth $1.00 at this size, whatever the leverage. Leverage decides how big a position you are allowed to open. It does not make a position safer, and a larger allowed size is easy to misuse. The margin calculator shows the margin for any size and leverage. Limits on leverage vary by country and broker.

If losses use up too much of the account, the broker can close your trades. The level at which that happens varies, so read your broker's terms.

Spread and other costs

Every pair has two prices at once. The bid is what you get if you sell. The ask is what you pay if you buy. The ask is higher. The gap is the spread, and it is a cost you pay on every trade. In the made-up quote here the bid is 1.0999 and the ask is 1.1001, so the spread is 2 pips.

You buy at the ask, and a buy is closed at the bid. So the moment you open, the trade is already behind by the spread. At $1.00 a pip, 2 pips cost $2.00.

Some accounts add a commission per trade. Holding a trade overnight can also add or subtract a small financing charge, which varies by pair and broker. We leave the overnight charge out of the example, but a real trade held for days would include it.

A worked trade, with costs

All the numbers here are made up. A trader with a $1000 account buys 0.10 lot of a made-up pair at the ask of 1.1001. The commission is $1.40 for the round trip. We look at two outcomes, one up and one down, because both can happen.

In the win case the bid rises to 1.1050. From the ask of 1.1001 that is 49 pips, worth $49.00. After the $1.40 commission the net is $47.60. The spread is not a separate line because it is already inside the move. The quoted bid went from 1.0999 to 1.1050, which is 51 pips, and the 2 pip spread took 2 of them.

In the loss case the bid falls to 1.0950. From the ask of 1.1001 that is -51 pips, or -$51.00. With the commission the net is -$52.40, which is 5.24 percent of the account.

Three things to take from it. The win and the loss are not mirror images, because costs sit on both. The margin held for this trade was $366.70, which is not the amount at risk. And the loss was limited only because the trader chose a size and a place to close. The next section shows what happens without those choices.

The main ways beginners lose money

Too much leverage and too big a size

Take the same $1000 account but open 1.00 lot. Each pip is now $10.00. The margin is 100000 x 1.1001 / 30 = $3667.00, which is more than the whole account, so it would not be allowed at 30 to 1. Suppose a broker allowed it at a higher leverage. A move of just 100 pips against you would cost $1000, the entire account, compared with 1000 pips at 0.10 lot. A pair can move that far on a busy day or a news release. Size, not the leverage label, decides this.

No stop

A stop loss is an order that closes a trade at a set price. Without one, the only exit is your own decision, made while the loss grows. People hold losers hoping they come back, and add to them. A trade with no planned exit has no planned loss either. The stop loss calculator shows the pips and money between an entry and a stop. A stop is not perfect: in a fast market a fill can be worse than the stop price, which is called slippage.

Risking a large share of the account on one trade

The position size calculator works out a size from the account, the share you are willing to lose and the stop distance. A few losses in a row at a large share leave a hole that is hard to climb out of. A 50 percent loss needs a 100 percent gain to repair.

Ignoring costs

Spread and commission are paid win or lose. A rule that trades many times a day pays them many times. A small average gain per trade can be wiped out by them. Always work out the result after costs, as the table above does.

Practise on a demo first

A demo account trades with pretend money at live prices. Use it to place orders, set stops, watch the spread and see the margin figure move. Treat it as practice for the mechanics. It cannot show how you will feel with real money on the line, and its fills can be cleaner than real ones. Keep a log of each demo trade. Only after you can explain every number on the screen could a small real account make sense, and that choice is yours.

Where bots fit

An automated program that places forex trades is often called a forex robot or expert advisor. It follows fixed rules and does the same arithmetic as above, with no pause. That speed is also the risk, because a bad size or a missing stop is repeated without hesitation. The forex robot page explains what they are and how they fail.

What this page does not tell you

It does not say which pair to trade, when to buy or sell, or whether trading forex will be worth your time. All prices are made up. Real spreads, margin rules, leverage limits and costs differ by broker and country, and change over time. This is education, not advice.