What Is Forex and How Does It Work?

What is forex?

Forex (FX) is the market where the world’s currencies are exchanged. Every time a company pays a foreign supplier, a traveler changes money or a central bank adjusts its reserves, currencies change hands in this market.

Traders take part to profit from changes in exchange rates. If you expect the euro to rise against the US dollar, you buy EUR/USD; if you expect it to fall, you sell.

How big is the forex market?

Forex is the largest financial market in the world. According to the Bank for International Settlements (BIS), currency trading averaged US$9.6 trillion a day in April 2025, up 28% from US$7.5 trillion in 2022.

Trading is concentrated in a few centers: the United Kingdom handled about 38% of global turnover and the United States about 19% (BIS, 2025).

How do currency pairs work?

A currency pair shows the price of one currency in terms of another. The first currency is the base currency and the second is the quote currency.

If EUR/USD is 1.0800, one euro costs 1.08 US dollars. When the price rises to 1.0900, the euro has strengthened against the dollar.

The most traded pairs, called the majors, all include the US dollar:

Pairs without the US dollar, such as EUR/GBP, are called minors or crosses. Pairs with a currency from a smaller or emerging economy, such as USD/TRY, are called exotics and usually move more sharply.

What are pips, spreads and lots?

These three terms describe how prices move, what a trade costs and how big it is.

• Pip: the smallest standard price step, usually the fourth decimal place (0.0001). For pairs with the Japanese yen, it is the second decimal place (0.01).
• Spread: the difference between the buy (ask) price and the sell (bid) price. It is a cost you pay on every trade.
• Lot: the size of a trade. One standard lot is 100,000 units of the base currency; a mini lot is 10,000 and a micro lot is 1,000.

Worked example: EUR/USD rises from 1.0800 to 1.0850, a move of 50 pips. On one standard lot, one pip is worth US$10, so the move equals US$500. On a micro lot (0.01), the same move equals US$5. A move of the same size in the other direction would be a loss of the same amount.

Who trades forex?

The forex market includes central banks, commercial banks, companies, investment funds and individual traders. Banks and large institutions handle most of the volume, while individual traders take part through online brokers and platforms such as MetaTrader 5.

When is the forex market open?

The forex market is open 24 hours a day from Monday to Friday, because trading moves around the world with the business day.

The overlap between London and New York is usually the busiest and most liquid time of the day. Check exact times in your MT5 server time. [CONFIRM: TradingRoad server time zone]

What moves currency prices?

Currency prices move mainly with interest rates, inflation and economic data, because these change what investors earn by holding a currency.

• Interest rate decisions by central banks such as the US Federal Reserve and the European Central Bank
• Inflation data, which influences future interest rates
• Economic reports such as employment, growth and trade figures
• Politics and global events, from elections to conflicts
• Risk sentiment: in uncertain times, money often moves into the US dollar, the Japanese yen and the Swiss franc

Use the economic calendar to see when major reports are released.

How does leverage work in forex?

Leverage lets you open a position larger than your deposit, by setting aside only part of the position’s value as margin. It increases both your possible gains and your possible losses.

For example, with leverage of 1:100, a margin of US$1,000 controls a position worth US$100,000. A 1% move in your favor would add US$1,000, but a 1% move against you would cost US$1,000, your whole margin. Maximum leverage at TradingRoad depends on your account type. [CONFIRM: maximum leverage] Lesson 3 of our course, Leverage and margin, explains this step by step.

How can you start trading forex on MetaTrader 5?

You can start in five steps:

1. Open a free demo account to practice with virtual money.
2. Log in to MetaTrader 5 and add EUR/USD to Market Watch.
3. Watch how the price, spread and chart move during the London and New York sessions.
4. Place small demo trades with a stop loss and a take profit on every trade.
5. Follow a written plan for several weeks before you consider a real account.

Read our full guide on how to start trading and see the forex market page for available pairs.

What are the risks of forex trading?

The biggest risk in forex trading is leverage, because small price moves can create large losses quickly. Prices can also jump on unexpected news, and exotic pairs can move sharply with wider spreads.

Overnight financing may apply to positions held past the daily rollover. Only trade money you can afford to lose, and always use a stop loss.

Frequently asked questions

Sources

1. Bank for International Settlements, OTC foreign exchange turnover in April 2025, 30 September 2025.
2. European Central Bank, What is the role of exchange rates?
3. MetaQuotes, MetaTrader 5 Market Watch: Bid, Ask and Spread.
4. MetaQuotes, MetaTrader 5 demo account instructions.

Educational content, not investment advice. Trading with leverage carries a high risk of losing money rapidly.