Section 1
How the forex market works
Unlike shares, which trade on a central exchange, currencies trade over-the-counter (OTC). There is no single building or order book. Instead, banks, brokers, payment firms and other institutions quote prices to each other and to their clients through electronic networks. Because there is no one official price, the quote you see can differ slightly from one provider to another.
The market runs 24 hours a day from Monday morning in Asia-Pacific to Friday evening in New York. It does not close overnight because trading hands over from one financial centre to the next as the day moves around the world. Four sessions are usually described:
| Session | What to expect |
|---|---|
| Sydney | Opens the trading week; quieter, AUD and NZD pairs lead |
| Tokyo | Asian business hours; JPY pairs most active |
| London | Busiest single centre; euro, sterling and Swiss franc pairs |
| New York | US hours; dollar pairs react to US data |
Exact hours shift with daylight saving time.
Activity is not even across the day. When two centres are open at the same time — especially London and New York — more participants are trading and prices are usually tighter. Quieter hours tend to bring wider spreads. Our lesson on market sessions and volatility covers the timing in detail.
Section 2
Currency pairs explained
Every forex price compares two currencies. The first is the base currency; the second is the quote currency. The price tells you how much of the quote currency one unit of the base currency is worth.
Reading a quote
Buying a pair means buying the base currency and selling the quote currency at the same time. Selling a pair is the reverse. Pairs are commonly grouped into three families:
| Group | What it means | Examples |
|---|---|---|
| Majors | The US dollar paired with another heavily traded currency | EUR/USD, USD/JPY, GBP/USD |
| Minors (crosses) | Two major currencies without the US dollar | EUR/GBP, AUD/JPY, EUR/CHF |
| Exotics | A major currency paired with a less widely traded one | USD/TRY, EUR/PLN, USD/ZAR |
Majors are generally the most traded and usually have the lowest costs. Exotics can move sharply and tend to carry wider spreads and higher overnight financing.
Section 3
Who trades forex and why
Most currency exchange has nothing to do with speculation. It happens because people and organisations need a different currency to do business, invest or travel.
| Participant | Typical reason |
|---|---|
| Businesses | Pay suppliers, receive foreign revenue, protect profits from currency swings |
| Central banks | Manage reserves and, at times, influence their own currency |
| Investors and funds | Buy foreign assets, hedge exposure, or speculate on rate moves |
| Retail traders | Speculate on short- or long-term price changes through a broker |
Retail traders are a small part of this picture. They usually reach the market through a broker, which provides prices and a trading platform, rather than dealing directly with banks.
Section 4
What moves exchange rates
An exchange rate changes when demand for one currency rises or falls relative to the other. That demand responds to a handful of broad forces:
| Driver | Typical effect |
|---|---|
| Interest rates | Higher rates can attract capital and support a currency |
| Inflation | Persistently high inflation erodes purchasing power and can weigh on a currency |
| Economic data | Jobs, growth and spending figures change expectations about rates |
| Risk sentiment | In nervous markets money often moves toward currencies seen as safer |
Markets react less to the news itself than to how it compares with what was expected. A strong jobs report that was already anticipated may barely move prices, while a surprise can move them quickly. The forex fundamental analysis lesson explains how traders study these drivers.
Section 5
Forex trading vs exchanging money for travel
Swapping pounds for euros before a holiday is a forex transaction: you hand over one currency and receive another, and you keep the cash. The provider's margin is built into the rate you are given.
Forex trading is different. A trader is not trying to spend the currency but to profit from a change in its price. Most retail trading uses leveraged derivatives such as CFDs, so you never take delivery of any currency — you hold a contract whose value follows the exchange rate. That makes it possible to gain or lose far more than the travel-money equivalent from the same price move.
Section 6
What forex trading costs
Every trade has a cost, even when a broker advertises "commission-free" trading. The three main costs are:
| Cost | What it is | When you pay it |
|---|---|---|
| Spread | The gap between the buy (ask) and sell (bid) price | Paid on every trade |
| Commission | A fixed fee per lot on some account types | Usually on raw-spread accounts |
| Swap | Overnight financing charged or credited for holding a position | When positions stay open past rollover |
Small differences add up when you trade often, so it is worth comparing all-in costs rather than headline spreads alone. Read trading costs explained for worked examples, and use our spread meter to compare published reference spreads between brokers.
Section 7
The risks
Forex brokers usually offer leverage: you put down a deposit (margin) and control a much larger position. Leverage magnifies both gains and losses, and a small move against you can wipe out the margin on a trade quickly.
Most retail forex trading is done through CFDs (contracts for difference). Regulators in many countries require brokers to publish the share of their retail CFD accounts that lose money, and in practice that figure is usually well above half. Prices can also gap over weekends or around major news, so a stop-loss is not guaranteed to fill at your chosen level.
Before you risk real money
Section 8
Is forex right for you? How to start safely
Forex trading suits people who are willing to study, follow rules and accept that losses are part of the process. It is not a reliable way to make quick money. If you want to explore it, a sensible order is:
- Learn the basics step by step with our forex course for beginners.
- Practise on a demo account until you understand orders, margin and costs.
- Compare regulated brokers on costs, regulation and account types before opening a live account.
- Start small, keep a trading journal and review your decisions regularly.
FXSpreadMeter beginner checklist
Before moving to the next lesson, I understand:
- Forex is the global market for exchanging one currency for another.
- Every quote is a pair: the base currency priced in the quote currency.
- Rates move on interest rates, inflation, data and risk sentiment.
- Spreads, commissions and swaps are the main trading costs.
- Leverage magnifies losses, and most retail CFD accounts lose money.
Keep learning
Next, learn the vocabulary of trading — pips, lots, leverage and order types.
Frequently asked questions
What is forex in simple terms?
Forex is the exchange of one currency for another. The forex market is the worldwide network of banks, brokers, businesses and individuals that buy and sell currencies, and the exchange rate is the price of one currency measured in another.
How does forex trading work?
A trader buys one currency and sells another at the same time, usually through a broker. If you buy EUR/USD you are buying euros and selling dollars; you gain if the euro rises against the dollar and lose if it falls. Most retail trading is done with leveraged products such as CFDs, which means you do not own the currencies themselves.
Is forex trading legal?
In most countries forex trading is legal, but the rules differ. Many regulators restrict leverage, require risk warnings and limit which products can be sold to retail clients. Some countries restrict or ban it. Always check the rules where you live and use a broker regulated for your country.
How much money do I need?
Some brokers allow very small deposits, but the right amount is money you can afford to lose entirely. Starting with a demo account costs nothing and lets you learn how pricing, orders and costs work before risking real money.
What is a pip?
A pip is a standard unit of price movement. For most pairs it is the fourth decimal place (0.0001); for pairs quoted in Japanese yen it is the second decimal place (0.01). Spreads are usually quoted in pips.
What is a spread in forex?
The spread is the difference between the price you can buy at (ask) and the price you can sell at (bid). It is a built-in cost: a new position starts slightly negative by the size of the spread.
Risk warning: CFDs and leveraged forex are complex instruments and come with a high risk of losing money rapidly due to leverage. Most retail investor accounts lose money when trading CFDs. Consider whether you understand how they work and whether you can afford to take the high risk of losing your money. This lesson is educational information only and is not investment advice.
FXSpreadMeter Education
Written by: FXSpreadMeter Editorial Team
Last reviewed: 1 October 2026
This lesson is general educational information produced in-house. It is not personal advice, not a recommendation, and it has not been reviewed by an external financial adviser. Trading leveraged products carries a high level of risk to your capital.
