What Is Forex? How Currency Pairs Work (With Simple Examples)
Table of Contents
What is forex (FX)?
Forex (foreign exchange, or FX) is the market where currencies are exchanged. If you’ve ever converted money for travel, paid for an international service, or bought something priced in another currency, you’ve interacted with an exchange rate.
In trading, forex usually means trying to profit from changes in exchange rates over time. The key idea is simple:
- A currency’s value is typically expressed relative to another currency (an exchange rate).
Market vs product (important): Forex is the currency exchange market, but your trading experience depends on the product you use (for example, OTC instruments or derivatives such as CFDs/rolling spot FX), which can carry different costs, risks, and protections—see Risk Disclosure and Legal Documents.
How big is the forex market?
Forex is one of the world’s largest financial markets. According to the BIS 2025 Triennial Survey (April 2025), average daily turnover in OTC FX markets was $9.6 trillion per day (up from $7.5 trillion in 2022).
Source: BIS – Triennial Survey 2025
Why this matters for beginners:
- You’re learning a global market with deep institutional participation.
- Market size doesn’t make it “easy.” Your outcomes still depend on costs, risk control, and discipline.
What does EUR/USD mean (base vs quote)?
Forex prices are shown as currency pairs. A pair answers one question:
- How much of currency B do you need to buy 1 unit of currency A?
Base currency vs quote currency
Take EUR/USD:
- EUR = base currency (the first currency)
- USD = quote currency (the second currency)
If EUR/USD = 1.1000, it means:
- 1 EUR costs 1.10 USD
“Buy” a pair vs “sell” a pair
A beginner-friendly way to think about it:
- If you buy EUR/USD, you’re betting the EUR strengthens vs USD.
- If you sell EUR/USD, you’re betting the EUR weakens vs USD.
Majors, crosses, and exotics (what beginners should start with)
- Majors: pairs involving USD (EUR/USD, GBP/USD, USD/JPY)
- Crosses (minors):non-USD pairs (EUR/GBP, EUR/JPY)
- Exotics:major currency vs less-traded currency (often wider spreads and sharper moves)
Beginner recommendation: start with a major (like EUR/USD) to reduce unnecessary complexity.
How do you read a forex quote? (3 simple examples)
Here are three examples that build confidence fast.
Example 1: EUR/USD
- EUR/USD = 1.1000 → 1 EUR = 1.10 USD
- If it rises to 1.1050, EUR strengthened vs USD.
Example 2: USD/JPY (JPY pairs are quoted differently)
- USD/JPY = 150.00 → 1 USD = 150 JPY
- If it moves to 151.00, USD strengthened vs JPY.
Example 3: A cross pair like EUR/GBP
- EUR/GBP = 0.8500 → 1 EUR costs 0.85 GBP
- You’re comparing EUR vs GBP directly.
Mini “diagram” (quote breakdown)
PAIR: EUR/USD
Base currency: EUR
Quote currency: USD
Example prices:
Bid: 1.0998 (price you typically sell at)
Ask: 1.1000 (price you typically buy at)
Spread: 0.0002 (Ask – Bid)
Meaning:
1 EUR costs about 1.10 USD
Why are there two prices (bid and ask)?
On most platforms, you’ll see two prices:
- Bid: the price you can typically sell at
- Ask: the price you can typically buy at
This matters because your trade opens and closes using different sides of the quote—so costs and execution are real from the first second.
What is the spread in forex?
The spread is the difference between Ask and Bid:
- Spread = Ask − Bid
The spread is one of the most important beginner concepts because it’s a core trading cost. Your trade usually needs to move in your favor enough to cover the spread before it becomes profitable.
When spreads can widen
Spreads often widen when:
- market liquidity is lower,
- volatility spikes (big news),
- sessions shift and pricing becomes “noisier.”
Costs (honest and practical)
Costs are part of trading: even if an account has “no commission,” you can still pay costs through the spread, and depending on the product, there may also be swap/financing and other charges.
See: IST Markets Fees
What is a pip?
A pip is a standard unit used to measure price movement.
- For most pairs, a pip is typically 0.0001 (4th decimal place).
- For JPY pairs, a pip is typically 0.01 (2nd decimal place).
Reference: OANDA – What is a pip?
One pip example (only)
Example: On EUR/USD, a move from 1.1050 → 1.1051 is 1 pip (on standard 4-decimal quoting).
Important: A pip measures price movement—your profit/loss depends on position size, costs (spread/fees), and account currency.
What is a lot (and why size matters)?
A lot (or units) describes your trade size. A common reference model:
- Standard lot: 100,000 units
- Mini lot: 10,000 units
- Micro lot: 1,000 units
Reference: OANDA Help – Micro lots
Why size is the real “difficulty level”
Two people can take the same trade idea, but feel totally different outcomes because of size:
- Bigger size = bigger P/L swings = stronger emotions
- Stronger emotions often lead to bad behavior (overtrading, moving stops, revenge trading)
Beginner rule: Start small enough that your brain stays calm. Skill comes before size.
What is leverage and margin (and why it’s risky)?
Leverage allows you to control a larger position with a smaller amount of capital (margin). It can magnify outcomes in both directions.
Retail regulators emphasize understanding leverage risk and doing due diligence on product and counterparty. Reference: CFTC – Retail Forex advisory
Expert Insight (Risk-first):
Most beginner losses don’t come from predicting direction—they come from oversizing and inconsistent risk control. If you can’t explain your risk in one sentence, reduce size and return to demo.
What order types should beginners know?
Before going live, you should be comfortable with the basics:
Market order
Executes immediately at the best available price.
Pending orders (placed in advance)
- Limit orders: aim to enter at a better price.
- Stop orders: trigger if price moves beyond a level (often used for breakout-style entries).
Stop Loss (SL) and Take Profit (TP)
- Stop Loss: predefined exit to cap loss
- Take Profit: predefined exit to capture profit
Rule for beginners: No SL = no trade.
Is forex open 24/5? (Sessions explained simply)
Forex is generally available 24 hours a day on weekdays (24/5), because trading activity spans multiple global financial centers.
A common way to think about activity is via major sessions: Sydney, Tokyo, London, New York. Activity is often higher during session overlaps (especially London/New York).
Reference: Investopedia – Forex market trading hours
Practical tip: Always view session times in your local timezone and avoid trading if you don’t understand what’s driving volatility (especially around major news).
How should a beginner start (demo-first plan)?
The fastest way to become “not confused” is to follow a simple process.
1) Choose one pair for 30 days
Pick a major pair (e.g., EUR/USD) and focus on learning:
- how price moves,
- how spreads behave,
- how your platform executes orders.
2) Open a demo account and practice execution
Use demo to master:
- opening/closing trades,
- placing SL/TP,
- using pending orders without impulsive entries,
- observing costs (spread/fees).
Open a demo: Free Demo Trading Account
Direct registration: Register demo account
3) Learn your costs before funding
Review costs and policies first:
4) Use a beginner checklist (before any trade)
- Do I understand what the pair quote means (base vs quote)?
- Do I know the current spread and is it unusually wide?
- Is my Stop Loss set before/at entry?
- Am I trading my plan—or my emotions?
Related guide: How to Start Trading from Scratch