Forex is the exchange of one currency for another. Every trade is simultaneously a purchase of one currency and a sale of another — you are never simply long, you are always long one thing and short another.
Reading a pair
In GBP/USD = 1.2750, GBP is the base currency and USD is the quote. The number is how many US dollars buy one pound. Buying the pair means buying pounds and selling dollars.
This relativity trips people up constantly. GBP/USD can rise because the pound strengthened, because the dollar weakened, or both. Analysing only one half of the pair is the most common analytical error in forex.
| Group | Examples | Characteristics |
|---|---|---|
| Majors | EUR/USD, GBP/USD, USD/JPY, USD/CHF | Tightest spreads, deepest liquidity — where beginners should stay |
| Commodity pairs | AUD/USD, USD/CAD, NZD/USD | Track commodity prices and global risk appetite |
| Crosses | EUR/GBP, GBP/JPY, EUR/JPY | No USD; wider spreads and often larger ranges |
| Exotics | USD/TRY, USD/ZAR, USD/MXN | Wide spreads, gap risk, political risk — avoid while learning |
Pips and position size
A pip is the standard increment: the fourth decimal place for most pairs (0.0001), and the second decimal for JPY pairs (0.01). A move from 1.2750 to 1.2770 is 20 pips.
| Lot size | Units | Approx. value per pip (USD-quoted) |
|---|---|---|
| Standard | 100,000 | $10 |
| Mini | 10,000 | $1 |
| Micro | 1,000 | $0.10 |
| Nano | 100 | $0.01 |
Micro lots are how a small account should trade. On a £2,000 account risking 1% (£20), a 30-pip stop means about £0.67 per pip — well under a mini lot. If your broker's minimum forces a larger size than your risk allows, the honest answer is that the trade is too big, not that the risk rule should bend.
Sessions and liquidity
Forex runs continuously from Sunday evening to Friday evening, but it is emphatically not uniform. Liquidity follows the working day around the globe.
- Sydney and Tokyo — quieter overall; most relevant for JPY, AUD and NZD pairs.
- London — the largest FX centre by volume. European pairs are at their most active.
- New York — US data lands here, and the dollar is on one side of most volume.
- The London–New York overlap — roughly 13:00–16:30 UK, and comfortably the busiest window of the day.
Which desks are open right now
Live · your local timeWhat actually drives exchange rates
- 1Interest rate differentials
Capital flows toward higher real yields. The gap between two central banks' expected paths is the single biggest medium-term driver.
- 2Inflation
Higher inflation erodes purchasing power, but also raises the probability of rate rises. The market's reaction depends on which effect dominates.
- 3Growth and employment
Strong data supports the currency, mainly through its implication for rates.
- 4Risk sentiment
In stress, capital flows to USD, JPY and CHF regardless of their own fundamentals.
- 5Trade and current account
Persistent deficits create structural selling pressure over long horizons.
Leverage — the defining risk
Forex brokers offer high leverage. In the UK and EU, retail leverage is capped at 30:1 on major pairs; elsewhere 500:1 is advertised. Leverage does not change your risk per se — it changes how much damage a given move does to your account.
Use leverage as flexibility, not amplification. It lets you hold a properly-sized position without tying up all your capital. The correct position size is determined by your stop distance and your risk percentage — never by the maximum the broker permits.
Costs specific to forex
- Spread — the main cost. Tight on majors in active hours; markedly wider in the Asian session and around news.
- Swap / rollover — interest paid or earned for holding overnight, reflecting the rate differential. Can be meaningfully negative on some pairs.
- Weekend gaps — the market closes Friday evening and reopens Sunday. News over the weekend produces an opening gap your stop cannot prevent.