The short answer
- A pair is the price of its first currency expressed in its second; going long means acquiring the first and paying with the second.
- Most pairs move in pips of 0.0001, and on a 100,000-unit standard lot a pip on a USD-quoted pair is worth $10.
- Retail leverage is capped (30:1 on majors in the UK, EU and Australia; 50:1 in the US), and positions held overnight pay or earn swap.
How forex trading works is easiest to understand from the quote on the screen outwards. A price such as EUR/USD 1.0920 says that one euro costs 1.0920 US dollars. Everything else in currency trading, from the spread to the margin call, is built on top of that one number and the way it moves.
What does a currency quote really say?
Short answer: the first currency is the base, the second is the quote, and the price tells you how many units of the quote currency buy one unit of the base.
If you buy EUR/USD you are buying euros and paying in dollars; if you sell it you do the reverse. You never trade "the euro" on its own, only against something else. That is why the same piece of news can push one pair up and another down.
Your platform always shows two prices. The bid is where you can sell and the ask is where you can buy. The gap between them is the spread, and it is the most basic cost of every trade: if EUR/USD shows 1.0919 / 1.0920, you start each position one pip behind.
Pairs fall into loose groups. The majors pair the US dollar with the euro, yen, pound, Swiss franc, Canadian dollar, Australian dollar or New Zealand dollar. Crosses, such as EUR/GBP or AUD/JPY, leave the dollar out. Exotics pair a major currency with that of a smaller or emerging economy and tend to have wider spreads and larger jumps.
Why does the dollar appear in so many pairs?
The dollar is on one side of the large majority of currency transactions because it is the main currency for international trade invoicing, commodity pricing and central bank reserves. For a trader, USD forex pairs have a practical advantage: on any pair where the dollar is the quote currency, such as EUR/USD, GBP/USD or AUD/USD, the profit or loss is already in dollars, and one pip on a standard lot is always worth $10.
When the dollar is the base, as in USD/JPY or USD/CAD, the pip is worth a fixed amount of the other currency, so its dollar value moves with the exchange rate. At USD/JPY 148.50, one pip on a standard lot is ¥1,000, which is about $6.73. Our pip calculator handles this conversion for you, including cross pairs where neither currency is the dollar.
How do pips and lots turn into money?
A pip is 0.0001 on most pairs and 0.01 on yen pairs. Many brokers quote an extra decimal, a fractional pip or pipette, but pips remain the unit people use to describe moves and stop distances.
Size comes in lots: 100,000 units of the base currency for a standard lot, 10,000 for a mini and 1,000 for a micro. The pip value scales in proportion: $10 per pip on a standard lot of EUR/USD, $1 on a mini lot and $0.10 on a micro lot.
Profit or loss = pips moved × pip value
What does leverage change, and why is it capped?
Short answer: leverage lets a small deposit, called margin, control a much larger position. It multiplies losses exactly as it multiplies gains.
At 30:1, every $1 of margin supports $30 of position. Regulators in the UK, EU and Australia cap retail leverage at 30:1 on major pairs and 20:1 on non-major pairs and gold; US retail forex is capped at 50:1 on majors and 20:1 on other pairs. The caps exist because currency moves are small but frequent, and a trader with 200:1 leverage can lose an entire deposit on a move that would barely register at 10:1.
When losses eat into your margin, the provider acts. Under UK and EU rules a retail position must be closed out when your margin level falls to 50% of the margin required, and negative balance protection means a retail client cannot lose more than the money in the account. The margin calculator shows the collateral any position ties up.
When does the forex market move most?
The market trades from Sunday 17:00 to Friday 17:00 New York time, but activity is uneven. The Asia-Pacific session, led by Sydney and Tokyo, is usually quieter for the euro and the pound. Volume rises when London opens and peaks during the hours when London and New York overlap. Late in the New York afternoon, spreads can widen as liquidity thins, especially around the 17:00 daily rollover.
Scheduled releases matter too: central bank rate decisions, inflation figures and employment reports can move a major pair by more in a minute than in the rest of the day. Many traders check an economic calendar before holding a position through such a release, and some providers widen spreads or raise margin around them.
What does holding a position overnight cost?
A retail forex position is not delivered; it is rolled forward each trading day at 17:00 New York time. At each rollover your account is charged or credited swap, which reflects the interest rate difference between the two currencies plus the provider's own markup. Because spot currency trades normally settle two business days later, the Wednesday rollover usually carries three days' swap to cover the weekend. Our guide to hidden trading costs shows how swap can outweigh the spread on longer trades.
Which order types matter most?
A market order fills straight away at the best available price, which in a fast market may differ from the price you saw, a gap called slippage. A limit order waits for a better price: buy below the current level or sell above it. A stop order triggers once the price reaches a level beyond the current one and then becomes a market order; stop-losses work this way, which is why they can fill worse than their level when the market jumps. Some platforms also offer stop-limit orders, which cap the fill price but may not fill at all, and guaranteed stops, which remove slippage for a fee.
Orders are only as good as the liquidity behind them. Over a weekend gap or a surprise central bank decision, a stop can be filled many pips away from where it was placed.
How forex trading works on one complete trade
An illustrative example, with round numbers chosen to make the arithmetic easy to follow rather than to reflect any real quote:
- You buy 0.4 lots (40,000 euros) of EUR/USD at 1.0920. The position's value is 40,000 × 1.0920 = $43,680.
- At 30:1 leverage the margin required is $43,680 ÷ 30 = $1,456.
- One pip on 0.4 lots is worth 0.4 × $10 = $4.
- You place a stop-loss at 1.0890, 30 pips below entry. If it is hit, the loss is 30 × $4 = $120, plus costs.
- If the price instead reaches your target at 1.0985, 65 pips above entry, the gain is 65 × $4 = $260, before spread, commission and any swap.
Notice that the size of the stop, not the leverage, determined the risk. The position size calculator works this backwards: start with the amount you are prepared to lose, and it gives the lot size.
How is gold traded alongside currencies?
Spot gold is quoted as XAU/USD, the price of one troy ounce in dollars. A standard gold lot is commonly 100 ounces, so a $1 move in the price is worth $100 per lot, and the minimum price step of $0.01 is worth $1. Retail leverage on gold is capped at 20:1 in the UK and EU. Gold often reacts to shifts in interest rate expectations and in the dollar itself, but it can also move sharply for reasons that have nothing to do with either.
Follow-up questions
Is forex trading the same as exchanging money for a holiday?
The underlying market is the same, but a retail trader almost never takes delivery of currency. Positions are contracts settled in cash, rolled forward each day, and closed for a profit or loss in the account currency.
Why does my broker show five decimal places?
The fifth decimal is a fractional pip, sometimes called a pipette. It lets prices move in smaller steps, but moves and stop-losses are still usually described in whole pips of 0.0001.
Do I need a large account to trade currencies?
Micro lots of 1,000 units make small positions possible, where one pip on a USD-quoted pair is worth about ten cents. A small account does not reduce risk if the position is large relative to it.
Sources
- UK Financial Conduct Authority, CFD rules for retail clients
- European Securities and Markets Authority, product intervention measures on CFDs
- US Commodity Futures Trading Commission and National Futures Association, retail forex leverage limits