What is forex trading? A plain-English guide

Most explanations of forex trading open with a number in the trillions and close with a lifestyle. The number is real. The lifestyle is marketing, and the gap between the two is where beginners get hurt: they learn how big the market is long before they learn what a single position in it can do to an account.

By the end of this you will be able to read a currency quote, work out what a pip is worth at three different sizes, explain what leverage does in plain arithmetic, and say which corner of this enormous market a retail trader in the UK touches. Nothing left undefined, and nothing you need to buy.

Forex, short for foreign exchange and often written FX, is the market where one currency is swapped for another. There is no building and no single exchange, only a network of banks, dealers and electronic venues quoting prices to each other and to their clients.

It is also the largest financial market there is. The Bank for International Settlements, which surveys it every three years, put average daily turnover at $9.6 trillion in April 2025, up from $7.5 trillion in its 2022 survey. The US dollar was on one side of 89.2% of those trades.

Much of that is not speculation of the kind you have in mind. FX swaps, largely banks and funds managing their funding, made up 42% of the total. And size tells you the big pairs are liquid, so you can usually get in and out at a fair price. It tells you nothing about whether you will call the direction correctly.

Currencies are always priced in pairs, because a price only means something against another currency. In EUR/USD, the euro is the base currency and the US dollar is the quote currency. A price of 1.0850 means one euro costs 1.0850 dollars. If the number rises, the euro is strengthening against the dollar. If it falls, the euro is weakening.

Taking a position means picking a side of that relationship. Buy EUR/USD, called going long, and you are positioned for the euro to strengthen against the dollar. Sell it, called going short, and you are positioned for the opposite. You can go short as easily as long, which surprises people who arrive from buying shares.

The spread deserves a second look. You buy at the higher price and sell at the lower one, so every new position starts slightly red by the width of the spread. On a busy major pair at a busy hour that is a fraction of a pip; on a thin pair late at night it can be many times wider.

A pip on its own is only a distance. What it is worth depends on how much currency your position controls, and that is measured in lots. A standard lot is 100,000 units of the base currency, a mini lot 10,000 and a micro lot 1,000. On any pair quoted in US dollars, such as EUR/USD or GBP/USD, one pip on a standard lot is worth $10, on a mini lot $1, and on a micro lot 10 cents.

Notice what never appeared in that sum: how confident you felt. Confidence changes by the hour. The 1% cap does not, which is why it sits above every other decision in a plan.

Leverage lets you control a position larger than the money you put down for it, and the money you put down is called margin. In the UK, the Financial Conduct Authority set the limits for retail clients trading contracts for difference, or CFDs, in its 2019 policy statement PS19/18: margin of at least 3.33% on major currency pairs, which works out at 30:1, and at least 5% on other currency pairs, or 20:1.

In plain arithmetic, £1,000 of margin can open a £30,000 position on a major pair. A 1% move against it is £300, or 30% of the margin, on a move a major pair can make inside a week. Leverage does not change how far price travels. It changes how much each move means to you, and the red direction arrives exactly as fast as the green one.

The same FCA rules require your provider to close positions once your funds fall to 50% of the margin needed to keep them open, and they stop you losing more than the money in your trading account. CFD providers must also print, in their risk warning, the percentage of their own retail accounts that lose money. If you ever look at a provider, read that number first.

Thirty-to-one is a ceiling the regulator allows, not a size anybody should trade at. When the 1% cap decides the size, leverage becomes nothing more than the mechanism that lets a small account hold a correctly sized position.

A retail trader in the UK almost never exchanges currency the way a business paying a supplier in euros does. You trade a product whose price tracks the exchange rate, usually a CFD or a spread bet, through a provider, and no euros change hands. In a market dominated by banks and funds, your orders are too small to disturb the price you are trading.

The market runs from Sunday evening to Friday evening UK time, following office hours from Sydney through Tokyo and London to New York. You do not need to watch it. Which hours suit you is the subject of our lesson on trading sessions.

• It is the biggest market, so it must be easier. Size gives you liquidity, not direction. A deep market is easy to get in and out of and no easier to predict.
• It is open all night, so I should be watching. Pick one window you can attend every week and let the rest of the day go.
• Leverage means I can start with almost nothing. Leverage lets a small account hold a position. It does nothing about what that position can cost.
• Forex is just gambling. It can be. With no plan and no size limit, it is gambling with extra steps. A written plan with a fixed cap, reviewed honestly in a journal, makes it a skill you can measure, though never one that guarantees anything.

Forex trading looks like a forecasting problem: which way next, and on which pair. For a beginner it is a measurement problem first. Know what one pip costs you, know what leverage is doing to that cost, and fix the amount at stake before you ever look for an entry. Everything else gets built on top of that, or it does not get built at all.