Forex in simple language
Foreign exchange, usually shortened to forex or FX, is the conversion of one currency into another. Businesses, banks, governments, travellers and market participants exchange currencies for different reasons.
A retail trader generally views prices through a broker or trading platform. The price shows how much of one currency is required to obtain another currency. A change in that relationship can create a gain or a loss.
A forex trade always involves two currencies. You are evaluating one currency relative to another.
How currency pairs work
A pair such as EUR/USD contains a base currency and a quote currency. EUR is the base and USD is the quote. A displayed price of 1.1000 means that one euro is valued at 1.10 US dollars in that quote.
If the pair rises, the base currency has strengthened relative to the quote currency under that pricing relationship. If it falls, the base currency has weakened relative to the quote currency.
Pips, lots and spreads
Pip
A pip is a standardized way of describing a small price movement. Its monetary value depends on the currency pair, trade size and account currency.
Lot
A lot describes position size. Larger positions mean that the same price movement produces a larger monetary change—positive or negative.
Spread
The spread is the difference between the quoted buy and sell prices. It is one part of trading cost, but commissions, financing and conversion charges may also apply.
Risk and leverage
Leverage allows a trader to control exposure that is larger than the margin deposited. This also means losses can grow quickly. Leverage does not make a trade safer or more likely to succeed.
A basic risk process considers account balance, risk percentage, stop-loss distance and position size together. You can explore these relationships using the FTB trading calculators.
Never assume that a stop-loss guarantees an exact exit price. Fast markets, gaps and execution conditions can affect the final result.
A careful beginner practice sequence
- Learn how pairs, orders and trading costs work.
- Understand leverage and maximum possible loss.
- Use a demonstration environment to learn platform controls.
- Keep a written plan and record decisions.
- Review results without assuming past performance will continue.
Starter glossary
- Base currency
- The first currency shown in a currency pair.
- Quote currency
- The second currency used to express the pair's price.
- Margin
- Funds set aside by a provider to support an open leveraged position.
- Stop loss
- An instruction designed to close a position around a specified level, without guaranteeing the exact execution price.