Module summary
- A currency pair is a price of one currency in another; you always buy one and sell the other at the same time.
- Pips measure price change and lots measure size; multiplied together with leverage, small moves become large sums.
- Costs arrive as spread, commission and overnight financing, and the provider's business model shapes how you are charged.
How forex trading works is simpler to describe than to master. You exchange one currency for another, hoping the rate moves in your favour, and you close the position by reversing the exchange. Everything else in this module, from pips to rollover, is detail about how that exchange is quoted, sized, financed and charged.
Reading a currency quote
A pair such as GBP/USD 1.2700 means one pound costs 1.2700 US dollars. The first currency is the base, the second the quote. Buying the pair is a bet that the base will strengthen against the quote; selling it is the opposite bet. Because every trade is relative, "the dollar is strong" only makes sense against a named partner.
Your provider shows two prices. The bid is what it pays when you sell; the ask is what it charges when you buy. The gap between them is the spread, and you pay it the moment a position opens. On the most traded pairs, in liquid hours, it is a fraction of a pip; on exotic pairs or around the daily rollover it can be many times wider.
Pips, lots and position size
A pip is the standard price step: 0.0001 for most pairs and 0.01 for pairs quoted in Japanese yen. Many platforms show a fifth decimal, a fraction of a pip often called a pipette.
Size is expressed in lots. One standard lot is 100,000 units of the base currency; a mini lot is 10,000 and a micro lot 1,000. For any pair quoted in US dollars, a pip on one standard lot is worth $10. For other pairs the value has to be converted, which is exactly what the pip value calculator does.
Leverage and margin
Because currencies usually move less than one percent a day, retail forex is almost always traded with leverage. The provider asks for a deposit, called margin, and lends the exposure for the rest. Regulators set ceilings: 30:1 on major pairs for retail clients in the UK, EU and Australia, 20:1 on non-major pairs, and 50:1 on majors for US retail forex. If your account equity falls to half of the margin in use, UK and EU rules require the provider to start closing positions, and retail clients there have negative balance protection.
Leverage does not change how much a pip is worth; it changes how little of your own money stands behind it. That is why losses feel sudden. The margin calculator and position size calculator are the practical way to see this before a trade, not after.
A worked trade, step by step
The figures below are illustrative. Suppose you buy 0.3 lots of GBP/USD at 1.2700, with a stop-loss at 1.2660 and a target at 1.2780.
- Size. 0.3 lots is 30,000 pounds. At 1.2700 the position is worth $38,100.
- Margin. At 30:1, the provider holds $38,100 ÷ 30 = $1,270 of your equity.
- Pip value. 30,000 × 0.0001 = $3 per pip.
- Risk. The stop is 40 pips away, so the planned loss is 40 × $3 = $120, plus costs and any slippage.
- Reward. The target is 80 pips away: 80 × $3 = $240 before costs.
Notice the relationship: a 1% move in GBP/USD would be worth $381 on this position, roughly thirty percent of the margin committed. That ratio, not the pip count, is what decides whether a trade is survivable.
Trading sessions and rollover
The market opens at 17:00 New York time on Sunday, when Wellington and Sydney begin their Monday, and closes at 17:00 New York time on Friday. Activity moves from Asia to Europe to North America, and the London and New York overlap is usually the busiest window with the tightest spreads.
At 17:00 New York each day, open positions roll to the next value date. You pay or receive financing, called swap, based on the interest-rate difference between the two currencies plus the provider's markup. Because spot trades settle two business days ahead, the Wednesday rollover usually carries three days of financing to cover the weekend.
The forex business behind your screen
It helps to understand the forex business model of the firm quoting your prices. Providers earn through the spread, through commissions, through the markup on overnight financing, and in some cases through client losses. A market maker takes the other side of your trade and manages the combined risk of all its clients; an agency or straight-through model passes orders to liquidity providers and charges a commission instead. Neither model is automatically better, but they create different incentives. Our cost breakdown shows how each charge appears on a statement, and the broker checklist explains how to find out which model a provider uses.
What moves exchange rates
- Interest-rate expectations. Central bank decisions, and above all the guidance about future decisions, shift the return on holding a currency.
- Economic releases. Inflation, employment and growth figures change those expectations, often within seconds of publication.
- Risk appetite. In stressed markets money tends to move toward currencies seen as safe havens, which can override local data.
- Flows. Trade balances, investment flows and large hedging programmes move rates in ways that do not always show up in headlines.
How analysts turn these drivers into a view is covered in the forex analysis module.
Orders you will meet on a forex platform
Beyond simple buy and sell at market, forex platforms offer pending orders that wait for a price. A limit order enters at a better price than the current one: a buy limit below the market, a sell limit above it. A stop order enters once price moves through a level: a buy stop above the market, a sell stop below it. Each position can carry a stop-loss to cap the loss and a take-profit to lock in a gain. Some providers also offer a guaranteed stop, which fills at exactly your level even in a gap, usually for an extra charge.
None of these orders changes the underlying risk of a leveraged position, but they turn a plan into instructions that are executed whether or not you are watching the screen. The MetaTrader web module shows how they appear in one common piece of software.
A sensible way to practise
Intermediate learners often know the vocabulary but have never tested it under realistic conditions. A demo account from a regulated provider is the obvious place to start, with two caveats: trade the size you would really use, not the default balance, and record costs as if they were real. Keep a short journal of each trade, noting why you entered, where the stop was and what happened. After fifty or so trades the journal will tell you more about your habits than any course. When you move to real money, start smaller than the demo, because decisions feel different when losses are real.
Questions from readers
Why is a yen pip 0.01 and not 0.0001?
Because one yen is worth far less than one dollar or euro, yen pairs are quoted with fewer decimal places. The convention keeps a pip roughly comparable in size across pairs.
What is triple swap Wednesday?
Spot currency trades settle two business days after the trade date. A position held through Wednesday's rollover moves its value date over the weekend, so financing for three days is usually charged or paid that night.
Does higher leverage make a trade riskier?
The risk of a trade comes from its size relative to your equity. Higher leverage lets you open a larger position with less margin, which is why it raises the chance that a normal move wipes out the account.
Sources
- European Securities and Markets Authority, CFD product intervention measures
- UK Financial Conduct Authority, CFD rules for retail clients
- US Commodity Futures Trading Commission and National Futures Association, retail forex leverage limits