What happens when you trade currencies

Forex trading is the buying and selling of one currency for another, usually through a broker or trading platform. When you trade forex, you are betting that the price of one currency will rise or fall against another. For example, if you buy the EUR/USD pair, you are buying euros and selling US dollars at the same time, hoping the euro will strengthen relative to the dollar so you can sell it back at a higher price.

The forex market operates 24 hours a day, five days a week across major financial centres in Tokyo, London, New York, and Sydney. Unlike stock exchanges, there is no central physical location — trades happen over the counter through a network of banks, brokers, and traders. The market moves based on economic data, interest rate decisions, geopolitical events, and shifts in supply and demand for currencies.

Most forex trades are speculative, meaning traders are not actually moving physical money between countries. Instead, they are trading contracts that represent the value of one currency against another. A broker holds your account and executes your trades, taking a small cut through spreads (the difference between the buy and sell price) or commissions.

Key Takeaways

  • Forex trades always involve two currencies at once — you buy one and sell the other simultaneously in pairs like EUR/USD or GBP/JPY.
  • The forex market is decentralized and operates 24/5 through banks and brokers, not through a single exchange like the stock market.
  • Leverage allows traders to control large amounts of currency with a small deposit, which magnifies both gains and losses.
  • Spreads and commissions are how brokers make money, and these costs reduce your profit on every trade you make.
  • Currency prices move based on economic reports, central bank decisions, and global events that affect the relative strength of one country's economy over another.

Currency pairs and how they are quoted

Every forex trade involves a pair of currencies written as a code like EUR/USD or GBP/JPY. The first currency is the base currency and the second is the quote currency. When you see EUR/USD quoted at 1.0950, that means one euro equals 1.0950 US dollars. If the price moves to 1.0960, the euro has strengthened — it now buys more dollars.

The most traded pairs are called majors and include EUR/USD, GBP/USD, USD/JPY, and USD/CHF. These pairs have tight spreads because they trade in huge volumes. Minor pairs involve currencies from developed economies but exclude the US dollar, such as EUR/GBP or AUD/JPY. Exotic pairs include currencies from emerging markets like USD/BRL (Brazilian real) or USD/ZAR (South African rand), and they have wider spreads because fewer people trade them.

The price you see on your screen is a two-way quote: a bid price (what a buyer will pay) and an ask price (what a seller wants). The spread is the difference between these two prices. On a major pair like EUR/USD, the spread might be 1 or 2 pips (the smallest unit of price movement). On an exotic pair, it could be 10 or 20 pips, which means it costs you more to enter and exit the trade.

Leverage and how it magnifies your money

Leverage lets you control a large amount of currency with a small deposit, called margin. If your broker offers 50:1 leverage, you can control $50,000 in currency with a $1,000 deposit. This is appealing because a small price move can generate a large profit — but it also means a small move against you can wipe out your entire deposit.

Leverage is expressed as a ratio. Common ratios are 10:1, 20:1, 50:1, and 100:1, though some brokers offer higher ratios. The higher the leverage, the less margin you need to open a trade, but the faster you can lose money. If you trade 100:1 leverage and the currency moves 1% against you, you lose 100% of your margin. Regulatory bodies in different countries set limits on how much leverage brokers can offer — the United States caps it at 50:1 for major pairs, while other countries allow higher ratios.

When your account balance falls below the margin requirement, your broker will issue a margin call and close your positions automatically to prevent you from owing money. This is a hard stop that protects both you and the broker, but it means you lose the trade at the worst possible moment.

Bid-ask spreads and how brokers make money

The spread is the cost of trading. When you buy EUR/USD at the ask price of 1.0950 and when ready sell at the bid price of 1.0948, you have lost 2 pips before the market even moves. That 2-pip difference goes to your broker. On a standard lot (100,000 units of the base currency), 2 pips equals $20 in profit for the broker.

Spreads vary based on market conditions and the pair you are trading. During high-volume times like the London and New York market overlap, spreads are tighter because there is more liquidity and more competition among brokers. During low-volume times like the Asian session for exotic pairs, spreads widen. Major pairs typically have spreads of 1 to 3 pips, while exotic pairs can have spreads of 10 to 50 pips or more.

Some brokers charge a flat commission per trade instead of a spread, or they charge both a small spread and a commission. A broker charging 0.5 pips spread plus $5 per lot traded may be cheaper or more expensive than a broker charging 2 pips spread with no commission — it depends on your trade size and how often you trade. Always compare the total cost, not just the spread.

How prices move and what drives currency values

Currency prices move based on the relative economic strength of two countries. If the US economy is growing faster than the eurozone, investors want more US dollars to invest in US assets, which pushes USD higher against the EUR. If the European Central Bank raises interest rates and the Federal Reserve does not, investors get a better return holding euros, which pushes EUR higher.

Economic data releases are major price movers. Reports like employment numbers, inflation data, GDP growth, and retail sales come out on a fixed schedule and can cause sharp price swings in seconds. Central bank decisions and statements from officials like the Federal Reserve chair can move markets significantly. Geopolitical events like elections, trade disputes, or military conflicts also shift currency values as investors reassess risk.

Supply and demand also play a role. If a country has a large trade surplus (exporting more than it imports), demand for its currency rises. If a country has political instability or high inflation, investors sell its currency. Currency prices reflect the collective judgment of millions of traders about which economy is stronger and safer.

Long and short positions explained

A long position means you buy a currency pair, betting the base currency will strengthen. If you go long EUR/USD at 1.0950, you profit if the price rises to 1.0960 or higher. You lose money if it falls to 1.0940 or lower. You hold the position until you decide to sell or your broker closes it due to a margin call.

A short position means you sell a currency pair, betting the base currency will weaken. If you go short EUR/USD at 1.0950, you profit if the price falls to 1.0940 or lower. You lose money if it rises to 1.0960 or higher. When you short, you are borrowing the base currency from your broker and selling it when ready, then buying it back later at a lower price to return it.

Most forex traders use both long and short positions depending on their view of the market. Some traders only go long, some only go short, and some switch between the two. The direction you choose — long or short — is your prediction about which way the currency will move.

Lot sizes and position sizing

A lot is a standardized unit of currency. A standard lot is 100,000 units of the base currency. A mini lot is 10,000 units. A micro lot is 1,000 units. Some brokers also offer nano lots of 100 units. The lot size you choose determines how much money moves with each pip of price movement.

On a standard lot of EUR/USD, one pip equals $10 in profit or loss. On a mini lot, one pip equals $1. On a micro lot, one pip equals $0.10. If you have a small account, trading micro lots lets you stay in the market without risking your entire balance on a single trade. If you have a large account and want bigger moves, you can trade standard lots or multiple lots at once.

Position sizing is how much of your account you risk on a single trade. A common rule is to risk no more than 1% to 2% of your account balance on any one trade. If your account is $10,000 and you risk 1%, you are risking $100 per trade. With EUR/USD at 1.0950, that might mean trading a micro lot with a stop loss 100 pips away, or a mini lot with a stop loss 10 pips away. The lot size and stop loss work together to control your risk.

Stop losses and take profit orders

A stop loss is an order that automatically closes your trade if the price moves against you by a certain amount. If you buy EUR/USD at 1.0950 and set a stop loss at 1.0940, your position closes automatically if the price falls to 1.0940, limiting your loss to 10 pips. Without a stop loss, you could hold a losing trade hoping it bounces back, and a margin call could close you out at an even worse price.

A take profit order automatically closes your trade when the price moves in your favour by a certain amount. If you buy EUR/USD at 1.0950 and set a take profit at 1.0970, your position closes automatically at that price, locking in a 20-pip gain. This prevents you from watching a winning trade turn into a loser because you waited too long to exit.

Most traders place both a stop loss and a take profit when they enter a trade. This defines the risk (distance to stop loss) and the reward (distance to take profit) before you enter. A trade with a 10-pip stop loss and a 20-pip take profit has a 1:2 risk-to-reward ratio, meaning you risk $100 to make $200. Over many trades, a positive risk-to-reward ratio helps offset the trades you lose.

Frequently Asked Questions

Why do forex prices move so fast?

Forex prices move based on new information entering the market — economic data, central bank statements, or geopolitical events. Millions of traders react within seconds, and algorithms execute trades automatically. Because leverage is high and volumes are massive, even small shifts in supply and demand cause sharp price swings. Major economic announcements can move prices 50 to 100 pips in minutes.

Can I make money trading forex?

Some traders do make money, but most retail traders lose money, especially early on. Successful forex trading requires understanding how markets work, managing risk carefully, and controlling emotions. Many traders underestimate how much skill and discipline it takes, or they use too much leverage and blow up their accounts on a single bad trade. Treat it as a skill to learn, not a quick way to make money.

What is the difference between forex and stocks?

Stocks represent ownership in a company; forex is trading one currency for another. Stocks trade on exchanges during set hours; forex trades 24/5 over the counter. Stocks typically use lower leverage; forex commonly uses 50:1 or higher. Stocks are influenced by company earnings and news; forex is driven by economic data and central bank policy. Both can be profitable, but they require different strategies and carry different risks.

Do I need a lot of money to start forex trading?

No. Many brokers let you open an account with $100 or less and trade micro lots. However, starting with very little money means you cannot risk much per trade without risking your entire account. Most traders recommend starting with at least $1,000 to $5,000 so you can trade reasonable position sizes and survive a few losing trades while you learn.

What time of day is best to trade forex?

The best time depends on which pair you trade and your strategy. Major pairs like EUR/USD are most liquid and have tight spreads during the London and New York session overlap (8 a.m. to noon EST). Asian pairs like USD/JPY are most active during the Tokyo session. Exotic pairs are often too wide during low-volume times. Most traders focus on the sessions when their chosen pairs are most active.