What Is Forex? What Beginners Need to Know

Forex (Foreign Exchange) is the market where foreign currencies are bought and sold. With trillions of dollars changing hands every day, it's the financial market with the highest daily trading volume in the world — larger than every stock market combined. It's open almost 24 hours a day from Monday to Friday because it isn't run from a single exchange: trading follows the sun from Sydney to Tokyo to London to New York, and as one financial center closes, another is already open.

Who Actually Trades Forex

Most forex volume doesn't come from individual traders. The market is dominated by:

• Banks and financial institutions — trading for clients and for their own books, providing most of the market's liquidity.
• Central banks — intervening to manage their currency's value or implementing monetary policy.
• Corporations — a Japanese company selling products in Europe eventually needs to convert EUR back to JPY, whether or not the exchange rate is favorable.
• Retail traders — individuals like you, accessing the market through a broker, typically the smallest slice of total volume.

This matters because it explains why prices move: much of the flow comes from participants who aren't speculating at all, and the biggest moves usually come from shifts in what banks and institutions are doing — often in response to economic news (see Technical vs Fundamental Analysis).

Currency Pairs

Trading forex means buying one currency while simultaneously selling another, so prices are always shown as a currency pair, for example:

• EUR/USD — Euro against the US Dollar
• USD/JPY — US Dollar against the Japanese Yen
• GBP/USD — British Pound against the US Dollar

The first currency is called the base currency, the second is the quote currency. The price shown is how many units of the quote currency are needed to buy 1 unit of the base currency. If EUR/USD is at 1.0850, one euro costs 1.0850 US dollars.

Pairs are commonly grouped into three tiers:

• Majors — pairs that include USD and another major economy's currency (EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, NZD/USD). These have the highest volume and the lowest trading costs.
• Minors / Crosses — major currencies paired without USD, like EUR/GBP or EUR/JPY. Still liquid, slightly wider spreads.
• Exotics — a major paired with a smaller or emerging-market currency, like USD/TRY or USD/ZAR. Much wider spreads and sharper, less predictable moves — generally not where beginners should start.

Bid, Ask, and How a Price Is Quoted

Every pair actually has two prices at any moment:

• Bid — the price you sell at.
• Ask — the price you buy at, always slightly higher than the bid.

If your platform shows EUR/USD at 1.0850 / 1.0851, you'd buy at 1.0851 and sell at 1.0850. That gap is the spread — more on it below.

Units You Should Know

Pip

A pip is the smallest standard price movement used to measure profit and loss. For most pairs it's the 4th decimal place — a move from 1.0850 to 1.0851 is 1 pip. Pairs that include JPY use the 2nd decimal place instead (147.50 to 147.51 is 1 pip). Most platforms today quote one extra digit beyond the pip, called a pipette (a tenth of a pip), which is why you'll often see five decimal places on screen.

Lot

A lot is the size of a trade. 1 Standard Lot equals 100,000 units of the base currency. There's also a Mini Lot (10,000 units) and a Micro Lot (1,000 units). Lot size determines how much each pip is worth to you — for pairs quoted in USD:

• 1 Standard Lot ≈ $10 per pip
• 1 Mini Lot ≈ $1 per pip
• 1 Micro Lot ≈ $0.10 per pip

This is why the same 50-pip move can be trivial or devastating depending on position size — a concept covered properly in Risk Management Basics.

Spread

The spread is the difference between the bid and ask price, and it's the main cost of every trade. A 1-pip spread on EUR/USD means every trade starts 1 pip "behind" — on a standard lot, that's $10 paid the moment you enter. Spreads are tightest on majors during busy hours and widen on exotics, during quiet hours, and around major news (see Trading Sessions).

A Worked Example

Say you buy 1 Mini Lot of EUR/USD at 1.0851 (the ask), expecting the euro to strengthen:

1. Price rises to 1.0901 and you close the trade by selling at the bid.
2. That's a 50-pip gain, at roughly $1 per pip on a mini lot = about $50 profit.
3. If price had instead fallen 50 pips, the same math applies in reverse: about a $50 loss.

Notice the trade only had two outcomes that mattered: how far price moved, and how big your position was. Direction gets all the attention, but position size is what decides whether a loss is survivable.

Before You Start Trading for Real

1. Understand that forex carries high risk and there is no way to guarantee profit — the leverage brokers offer amplifies losses just as much as gains (see Leverage and Margin).
2. Practice on a Demo Account until you're consistently comfortable placing orders, setting stops, and sizing positions before using real money.
3. Study risk management alongside chart analysis from day one, not as an afterthought — see Risk Management Basics.
4. Start with major pairs, where spreads are low and behavior is comparatively orderly.

Next lesson: How to Read Candlestick Charts