Introduction#

Forex trading is the buying of one currency and the simultaneous selling of another. When you buy EUR/USD, you are buying euros and selling US dollars. When you sell GBP/USD, you are selling pounds and buying dollars.

The forex market is the largest financial market in the world. The Bank for International Settlements (BIS) 2025 Triennial Survey measured average daily turnover at $9.6 trillion — up 28% from $7.5 trillion in 2022. This guide covers how the market works, who trades in it, and what you need to understand before participating.

How the Forex Market Works#

Unlike stocks, forex does not trade on a central exchange. It is a decentralized over-the-counter (OTC) market — trades happen electronically between banks, brokers, and institutions around the world through interbank networks.

The market operates 24 hours a day, 5 days a week — opening Sunday at 5:00 PM Eastern Time (when Sydney opens) and closing Friday at 5:00 PM ET (when New York closes). There is no opening bell and no closing auction. Trading simply migrates across time zones as major financial centres open and close.

Currency Pairs#

Currencies always trade in pairs. The first currency is the base, the second is the quote.

EUR/USD at 1.1500 means one euro costs 1.15 US dollars. If the rate rises to 1.1600, the euro strengthened (or the dollar weakened).

Major pairs (all include USD)#

  • EUR/USD — the most traded pair, representing 21.2% of global volume (~$2.03 trillion/day)
  • USD/JPY — second most traded, active during both Asian and US sessions
  • GBP/USD — historically volatile, sensitive to UK economic data and Bank of England policy
  • USD/CHF — the Swiss franc as a safe-haven currency
  • AUD/USD, USD/CAD, NZD/USD — commodity-linked pairs

Minor pairs (crosses, no USD)#

EUR/GBP, EUR/JPY, GBP/JPY, AUD/NZD. Tighter spreads than exotics but wider than majors.

Exotic pairs#

One major currency paired with an emerging market currency — USD/TRY, USD/ZAR, EUR/PLN. Wider spreads, lower liquidity, and higher volatility.

Currency dominance (BIS 2025)#

The US dollar appears on one side of 89.2% of all forex trades. The euro is on 28.9%, the yen on 16.8%, and the British pound on 10.2%. The Chinese yuan has grown to 8.5%.

Who Trades Forex#

Commercial and investment banks — responsible for over 80% of trade volume. They act as market makers, quoting bid and ask prices and profiting from the spread.

Central banks — approximately 5% of volume. They intervene to manage currency stability and implement monetary policy. The Bank of Japan, for example, has historically intervened when USD/JPY moves too rapidly.

Hedge funds and institutional investors — take large directional positions based on macroeconomic analysis. Their trades can move markets.

Corporations — hedge foreign exchange exposure from international trade. A US company paying European suppliers in euros buys EUR/USD to lock in a rate.

Retail traders — approximately 5.5% of total volume. Individual traders access the market through regulated brokers using leverage.

How to Read a Forex Quote#

Every currency quote has two prices:

  • Bid: the price at which the market (your broker) will buy the base currency — this is the price you sell at
  • Ask: the price at which the market will sell the base currency — this is the price you buy at

The difference between bid and ask is the spread — the broker's primary compensation on commission-free accounts.

EUR/USD at 1.1498 / 1.1500 has a bid of 1.1498 and an ask of 1.1500. The spread is 0.0002, or 2 pips. If you buy at the ask and immediately sell at the bid, you lose 2 pips — the cost of entering the trade.

Lot Sizes#

Position sizes in forex are measured in lots:

  • Standard lot: 100,000 units of the base currency — pip value approximately $10 on USD pairs
  • Mini lot: 10,000 units — pip value approximately $1
  • Micro lot: 1,000 units — pip value approximately $0.10
  • Nano lot: 100 units — pip value approximately $0.01

Most retail traders use mini or micro lots. Standard lots require significant capital or leverage to manage the risk.

Leverage#

Leverage allows you to control a larger position than your account balance would normally permit. At 50:1 leverage, $1,000 in your account controls $50,000 in currency.

Leverage amplifies both gains and losses proportionally. A 2% move in your favour on a 50:1 position produces a 100% return on your margin. The same 2% move against you wipes out your margin entirely.

Regulatory leverage caps:

  • US (CFTC/NFA): maximum 50:1 on major pairs, 20:1 on minors
  • EU (ESMA) and UK (FCA): maximum 30:1 on major pairs, 20:1 on minors. Mandatory negative balance protection
  • Australia (ASIC): mirrors EU limits since 2021
  • Offshore brokers: 500:1, 1000:1, or unlimited — with significantly less regulatory protection

The leverage available to you depends on which jurisdiction your broker's entity operates under — not just the broker's brand.

Trading Sessions#

The forex market operates in three overlapping sessions:

Asian session (approximately 00:00–09:00 UTC): Tokyo, Sydney, Singapore, Hong Kong. Lower volume, tighter ranges on EUR and GBP pairs. Most active for JPY and AUD crosses.

London session (approximately 08:00–17:00 UTC): The highest-volume session. London is the world's largest forex trading centre. EUR, GBP, and CHF pairs see peak liquidity.

New York session (approximately 13:00–22:00 UTC): Second highest volume. Overlaps with London from approximately 13:00 to 17:00 UTC — this London-New York overlap produces the tightest spreads and largest price moves of the day. Over 50% of daily forex volume occurs in this window.

Regulation and Access#

Retail traders access the forex market through licensed brokers. The regulatory framework varies significantly by jurisdiction:

United States: Brokers must be CFTC-registered and NFA members. Only six retail forex brokers currently serve US clients. The $20 million capital requirement eliminates most global brokers.

United Kingdom: Brokers must hold FCA authorisation. Client funds are segregated, FSCS compensation covers up to GBP 85,000 per firm, and negative balance protection is mandatory.

European Union: MiFID II framework enforced through national regulators (CySEC, BaFin, AMF). Standardised leverage caps and mandatory risk warnings.

Always verify your broker's registration directly through the regulator's database — NFA BASIC, FCA Register, or ASIC Connect. A logo on a website is not proof of regulation.

Retail Profitability#

Regulators in the EU and UK require brokers to disclose the percentage of retail accounts that lose money. The typical range across the industry: 70–85% of retail CFD and forex accounts lose money.

This disclosure is legally mandated under MiFID II (EU) and FCA rules (UK). It appears on every regulated broker's website. The figure reflects the difficulty of consistent profitability in leveraged markets — not that forex trading is inherently a losing proposition, but that most retail participants trade without adequate risk management, education, or capitalisation.

Key Takeaways#

  • The forex market trades $9.6 trillion per day (BIS 2025) — the largest financial market in the world
  • Currencies trade in pairs — you always buy one and sell another. EUR/USD is the most traded pair at 21.2% of volume
  • The market is decentralised and OTC — no central exchange. Trading runs 24/5 across Asian, London, and New York sessions
  • Leverage amplifies both gains and losses — US brokers cap at 50:1, EU/UK at 30:1. Higher leverage is available offshore but with less protection
  • The London-New York overlap is the highest-liquidity period — tightest spreads, largest moves, over 50% of daily volume
  • 70–85% of retail forex accounts lose money — mandatory disclosure figures from EU and UK regulators
  • Verify broker regulation directly through regulator databases (NFA BASIC, FCA Register, ASIC Connect) before depositing funds