Forex Explained Simply: How the Currency Market Works

If you've ever changed money at an airport before a holiday, you've seen two prices on the board: "We buy" and "We sell". The booth buys your dollars cheap and sells them to you a little more expensive. Forex is the same game, just on a worldwide scale and at lightning speed.

In this article you'll learn, in plain words, what forex is, how to read the prices, when the market is busiest, what leverage does, and how this market is linked to the others.

What is forex?

Forex is short for "foreign exchange". In this market you always trade one currency against another, which is why every symbol is called a currency pair.

Take EURUSD:

• EUR (the euro) is the base currency, the thing you're buying or selling.
• USD (the dollar) is the quote currency, the one the price is counted in.

If EURUSD is at 1.1000, it means one euro costs 1.10 dollars. If you think the euro will get stronger against the dollar, you buy. If you think it will get weaker, you sell. In forex, selling is just as easy as buying.

Reading the price: pips and spreads

Pips

A pip is the small unit of price movement. For most pairs a pip is the fourth decimal place (0.0001). For pairs with the Japanese yen, it's the second decimal place (0.01).

So if EURUSD moves from 1.1000 to 1.1020, it has risen 20 pips.

The spread

Remember the two prices at the airport booth? Forex always shows two prices too:

• Ask: the price you buy at, a little higher.
• Bid: the price you sell at, a little lower.

The gap between them is the spread, basically the fee you pay the moment you open a trade. The busier the market, the smaller the spread usually is.

Why is forex so big?

According to the latest survey by the Bank for International Settlements (BIS), about 9.6 trillion dollars a day changed hands in the currency market in April 2025. The dollar was on one side of about 89 percent of those trades, followed by the euro and the yen.

Who makes up all that volume? Big banks, companies that import and export, investment funds, governments and, of course, traders like you. The same survey says about 75 percent of trading happens in four hubs: the United Kingdom, the United States, Singapore and Hong Kong. That's why the market is at its busiest when London and New York are both open.

When is the market open?

Forex isn't one building with one door. It passes from one financial city to the next, so it's open around the clock from Monday morning to Friday night. The four main sessions look roughly like this (in UTC; they shift by about an hour when daylight saving time changes):

• Sydney: about 22:00 to 07:00
• Tokyo: about 00:00 to 09:00
• London: about 08:00 to 17:00
• New York: about 13:00 to 22:00

The busiest window is the London and New York overlap, roughly 1 pm to 5 pm in London, which is 8 am to noon in New York. Moves tend to be more serious and spreads tighter during those hours.

Lots, leverage and margin, in plain words

• Lot: the size of your trade. A standard lot is 100,000 units of the base currency and a mini lot is 10,000 units. With one mini lot of EURUSD, each pip is worth about 1 dollar.
• Leverage: trading a bigger amount than the money you put up. Leverage of 30:1 means every 1 dollar controls 30 dollars.
• Margin: the money your broker sets aside as a deposit to keep the trade open, like the security deposit when you rent a car.

Remember: leverage doesn't only make profits bigger; it makes losses just as big. That's why the European Securities and Markets Authority (ESMA) capped leverage on major currency pairs at 30:1 for retail traders.

Practical example: one trade on EURUSD

This example is hypothetical and only here to make things clearer.

• EURUSD is at 1.1000 and you think the euro will strengthen.
• You buy one mini lot (10,000 euros). That trade is worth about 11,000 dollars.
• With 30:1 leverage, the margin needed is about 367 dollars (11,000 divided by 30).
• You place your stop 30 pips lower, at 1.0970. Each pip is 1 dollar, so your risk is 30 dollars.
• You place your target 60 pips higher, at 1.1060. If it gets there, you make 60 dollars.

Notice what happened: before entering, you know exactly what the worst case is. That's professional trading, not gambling.

How forex connects to other markets

Forex sits in the middle of every market. A few key links:

• Interest rates and currencies: when a central bank raises interest rates, money usually flows into that country to earn the higher return, and its currency tends to strengthen. That's why decisions by the Federal Reserve and the European Central Bank move EURUSD so much.
• The dollar and gold: gold is priced in dollars, and the World Gold Council says gold has historically tended to move against the dollar. If you trade gold, keep one eye on the dollar.
• Currencies pegged to the dollar: some currencies barely move. The UAE dirham has been held at 3.6725 per dollar since 1997, and the Saudi riyal at 3.75 since 1986, so they simply move with the dollar.

These relationships are not fixed rules. In March 2024 Egypt let its currency float, and the Egyptian pound went from about 30.9 to about 50 per dollar in a single day. Even a relationship that looked stable for years can change overnight.

Common mistakes

• High leverage from day one: with high leverage, a small move can wipe out a big part of your account.
• Trading in quiet hours: at some times of day the market is thin and spreads get wider.
• Ignoring the economic calendar: interest rate and jobs news can move prices dozens of pips in minutes.
• Forgetting the spread: if the spread is 3 pips, your trade starts 3 pips in the red.
• Juggling ten pairs at once: get to know one or two major pairs really well first.

Practical checklist

• I've picked my pair and I know which currency is the base.
• I know its busiest hours in my own time zone.
• I've worked out what one pip is worth at my trade size.
• I set my stop and target before entering.
• I've checked today's economic calendar.

Frequently asked questions

Which pair should I start with?

Usually a major pair like EURUSD, because it trades in huge volume, has a small spread and information about it is everywhere.

How much money do I need to start?

You can start small, but the right trade size matters more than the amount. Trade so that one losing trade costs only a small slice of your account.

How is forex different from a bureau de change?

At a bureau de change you actually take the cash home. In forex trading you usually only trade the price change and never receive the currency.

Why do prices sometimes jump around late at night?

Because fewer traders are active at certain hours. The market gets thinner and spreads widen.

Wrapping up

Forex means trading one currency against another: the same thing an exchange booth does, but in the biggest market in the world. Once you understand pairs, pips, spreads, lots and leverage, and you know when the market is busy, you're halfway there. The other half is risk management and patience.

To learn step by step with real examples, check out the free courses and take a look at the pro tools in software.

Adapted from: BIS, Charles Schwab, ESMA, CMC Markets, Gulf News, SAMA, WAM and World Gold Council

Trading involves a significant risk of loss. This article is for education only and is not financial advice.