Forex trading short for foreign exchange, refers to the global marketplace for trading national currencies against one another. Because of the worldwide reach of trade, commerce, and finance, forex markets tend to be the largest and most liquid asset markets in the world.

How Does Forex Trading Work?

Forex trading works by simultaneously buying one currency while selling another. The currencies are quoted in pairs, such as EUR/USD or USD/JPY. The reason they are quoted in pairs is that in every foreign exchange transaction, you are simultaneously buying one currency and selling another.


Key Concepts in Forex Trading

  • Currency Pairs: As mentioned, currencies are traded in pairs. The first currency listed is the ‘base’ currency, and the second is the ‘quote’ currency. The pair indicates how much of the quote currency is needed to purchase one unit of the base currency.

  • Bid, Ask, and Spread: The ‘bid’ is the price at which you can sell the base currency, and the ‘ask’ is the price at which you can buy it. The ‘spread’ is the difference between the bid and the ask price.

  • Leverage: This is a feature offered by brokers that allows traders to control larger amounts of money than they actually have in their account. It’s expressed as a ratio (e.g., 100:1). While leverage can amplify profits, it can also amplify losses.

  • Pips: A ‘pip’ is a very small measure of change in a currency pair in the forex market. It can be measured in terms of the quote or in terms of the underlying currency.


Let’s say you believe the US dollar will rise against the euro. You might buy the USD/EUR pair. If the US dollar does indeed rise, you can sell the pair for a profit. If it falls, you would take a loss.

Suppose the EUR/USD pair is trading at 1.1200/1.1201 (bid/ask). The bid price is the price at which you can sell the EUR, and the ask price is the price at which you can buy the EUR. The difference between the bid and the ask price is the spread.

Forex trading can be complex and risky, so it’s important to understand the basics before you start trading. Always remember to trade with caution and never risk more than you can afford to lose.