Forex trading, or foreign exchange trading, is the buying and selling of one currency against another to profit from changes in their exchange rate. Forex is short for "foreign exchange."
Global OTC forex turnover reached about $9.6 trillion per day in April 2025, according to the Bank for International Settlements. A forex trade always involves a currency pair, such as EUR/USD, GBP/USD or USD/JPY.
When you trade EUR/USD, you are not buying euros on their own. You are buying euros while selling U.S. dollars at the same time.
Forex Trading at a Glance
| Feature | Explanation |
|---|---|
| What is traded? | Currency pairs |
| Example | EUR/USD |
| Main objective | Profit from exchange-rate movements |
| Where trades happen | Usually over the counter through a broker or dealer |
| Common costs | Spread, commission and overnight financing |
| Main risk | Leverage can magnify losses |
| Market scale | About $9.6 trillion in average daily OTC turnover in April 2025, according to the Bank for International Settlements |
How Does a Forex Trade Work?
A forex trade involves buying one currency against another and closing the position later at a different exchange rate.
Suppose EUR/USD is quoted at 1.0800. This means one euro is worth about 1.08 U.S. dollars.
- If you buy EUR/USD, you expect the euro to rise against the U.S. dollar.
- If you sell EUR/USD, you expect the euro to fall against the U.S. dollar.
For example, you buy EUR/USD at 1.0800 and sell it at 1.0850. The exchange rate has moved 0.0050 in your favor. On a position of 10,000 euros, the gross gain would be about $50 before spreads, commissions and other costs.
If the exchange rate moves against your position, you lose money.
What Is a Currency Pair?
A currency pair shows the value of one currency compared with another.
- The base currency is listed first.
- The quote currency is listed second.
In GBP/USD, the British pound is the base currency and the U.S. dollar is the quote currency. The price shows how many U.S. dollars are needed to buy one British pound.
Common currency pairs include:
| Pair type | Examples | Description |
|---|---|---|
| Major pairs | EUR/USD, GBP/USD, USD/JPY | High-volume pairs that usually include the U.S. dollar |
| Minor pairs | EUR/GBP, GBP/JPY, EUR/AUD | Pairs that do not include the U.S. dollar |
| Exotic pairs | USD/TRY, USD/ZAR, EUR/TRY | A major currency paired with an emerging-market currency |
Currency exchange rates are normally shown with a bid price and an ask price. The difference between them is the bid-ask spread, which is an immediate trading cost.
How Do Forex Traders Make or Lose Money?
Forex traders make or lose money based on the direction and size of a currency pair's price movement, after trading costs.
For a long trade:
- The trader buys the currency pair.
- The pair rises.
- The trader sells at a higher price.
For a short trade:
- The trader sells the currency pair.
- The pair falls.
- The trader buys it back at a lower price.
The result also depends on:
- The size of the exchange-rate movement
- The position size
- The bid-ask spread
- Broker commissions
- Overnight financing or rollover charges
- Leverage and margin requirements
A trade can move in the expected direction and still produce a small loss if the trading costs are greater than the price movement.
What Moves Forex Prices?
Forex prices move when traders change their view of the relative strength of two economies.
Factors that can affect exchange rates include:
- Central bank interest-rate decisions
- Inflation and employment data
- Economic growth
- Government debt and fiscal policy
- Political and geopolitical events
- Commodity prices
- International trade and investment flows
- Market expectations and investor sentiment
Forex trading is therefore a comparison between two currencies. A trader is not deciding whether one currency is simply "good" or "bad." The question is how one currency is expected to perform against the other.
What Are Leverage and Margin in Forex?
Margin is the money a broker requires to open and maintain a leveraged position. Leverage allows a trader to control a position larger than the amount deposited in the account.
For example, with illustrative leverage of 20:1, $500 of margin could control a position worth $10,000. Gains and losses would then be based on the $10,000 position, not only on the $500 deposited as margin.
Leverage can increase potential returns, but it also increases potential losses. Investor.gov warns that leveraged forex trading can result in the loss of the entire initial investment. Depending on the agreement with the dealer, losses may also exceed the initial deposit.
Leverage limits and customer protections vary by country, broker and product.
Is Forex Trading Conducted on an Exchange?
Retail forex trading is usually conducted in the over-the-counter, or OTC, market rather than through a central exchange.
In an OTC trade, the customer generally trades directly with a broker or dealer. The CFTC states that the dealer can act as the customer's counterparty. This means the customer relies on the dealer for pricing, execution, account records and withdrawals.
Forex exposure can also be obtained through exchange-traded products, including:
- Currency futures
- Currency options
- Currency-related exchange-traded products
These products have different contract terms, expiration dates, fees and regulatory structures from retail OTC forex.
What Are the Main Costs of a Forex Trade?
The main costs of a forex trade can include the spread, commission, overnight financing, conversion fees and slippage.
- Spread: The difference between the buying and selling price.
- Commission: A separate charge applied by some brokers.
- Overnight financing: A charge or credit for holding a leveraged position overnight.
- Conversion fees: Costs associated with funding or withdrawing money in another currency.
- Slippage: The difference between the expected execution price and the actual execution price.
A broker that advertises "commission-free" trading may still earn money through the spread or other charges. Investor.gov advises traders to understand how a dealer charges for forex transactions before opening an account.
What Are the Benefits and Risks of Forex Trading?
Forex trading provides access to global currency markets and can support both rising and falling positions, but the risks are substantial.
| Potential advantages | Main risks |
|---|---|
| Access to global currency markets | Leverage can magnify losses |
| Ability to trade rising or falling markets | Spreads, commissions and financing reduce returns |
| Many currency pairs are available | OTC trading involves counterparty risk |
| Flexible position sizes at some brokers | Prices can move quickly after economic news |
| Ability to hedge currency exposure | Fraudulent or unregistered dealers may refuse withdrawals |
The CFTC's forex advisory reports that about two-thirds of customers at registered OTC forex dealers lost money during the period covered by its disclosure. The figure included financing charges, fees and other expenses.
Is Forex Trading Suitable for Beginners?
Forex trading may suit a beginner who understands currency pairs, transaction costs, leverage and the possibility of losing the trading capital.
It is not suitable for money needed for rent, bills, emergency savings or other essential expenses.
Before depositing money, a beginner should:
- Learn how currency pairs are quoted.
- Understand how a broker calculates spreads and financing.
- Practise with a demo account.
- Use a position size that can withstand normal price fluctuations.
- Avoid treating high leverage as a shortcut to profit.
- Check whether the broker is authorised in the trader's jurisdiction.
- Read the broker's withdrawal, margin and risk-disclosure terms.
In the United States, the CFTC advises customers to verify a retail forex dealer's registration and disciplinary history. Customers can use the National Futures Association's BASIC database to check this information.
Bottom Line
Forex trading is a way to take a position on the relative value of two currencies. You buy a pair when you expect its price to rise and sell it when you expect its price to fall.
The mechanics are simple. Managing the risk is harder. Leverage, trading costs, OTC dealer arrangements and fast price movements can turn a small exchange-rate change into a large gain or loss.