A forex trade is an agreement to exchange one currency for another at a set price and time
When you make a forex trade, you are buying one currency while selling another at the same moment. The price you pay depends on the exchange rate — how much of one currency equals one unit of the other. If you buy euros with US dollars, you are betting that euros will be worth more dollars tomorrow than they are today. If you sell, you are betting the opposite.
Every forex trade involves a pair of currencies written as a ratio, like EUR/USD (euros and US dollars) or GBP/JPY (British pounds and Japanese yen). The first currency in the pair is the one you are buying or selling. The second is the one you use to pay for it or receive from it. The price listed — say, 1.08 — means one unit of the first currency costs 1.08 units of the second.
Forex trades happen over the counter, meaning directly between two parties through a broker, not on a central exchange like a stock market. The market runs 24 hours a day across Tokyo, London, and New York. There is no single "opening bell" or closing time.
Key Takeaways
- A forex trade is a contract to exchange one currency for another, and you profit or lose based on whether the exchange rate moves in your predicted direction.
- Currency pairs are written as two codes (like EUR/USD), and the price tells you how much of the second currency one unit of the first costs.
- Forex trades settle in two business days, meaning the actual money transfer happens two days after you place the trade, not immediately.
- Most retail traders use leverage, which means borrowing money from the broker to control a larger position than they could afford outright — this magnifies both gains and losses.
- Forex markets are open 24 hours a day across three major trading sessions, and prices move constantly based on economic news, interest rates, and geopolitical events.
The two sides of every forex trade: going long and going short
When you go long, you buy the first currency in the pair, betting its value will rise relative to the second. If you buy EUR/USD at 1.08, you own euros and owe dollars. If the rate rises to 1.10, each euro is now worth more dollars, so you sell and pocket the difference.
When you go short, you sell the first currency, betting its value will fall. You borrow euros from your broker, sell them for dollars at 1.08, and hope to buy them back at 1.05. If you do, you return the borrowed euros and keep the profit.
Both trades are settled two business days after you place them. This delay, called the settlement date, is a standard rule across forex markets. You do not receive or hand over the actual currency immediately — your broker holds the position until settlement.
How leverage works and why it matters
Most retail forex traders do not have enough cash to move currency prices meaningfully. A broker solves this by offering leverage — the ability to borrow money and control a much larger position than your account balance allows. Common leverage ratios are 50:1, 100:1, or even higher, meaning you can control $100,000 in currency with $1,000 of your own money.
Leverage cuts both ways. If the trade moves in your favor, your small deposit generates a large profit. If it moves against you, your small deposit covers a large loss. A 1 percent move in the exchange rate can wipe out your entire account or double it. Many retail traders lose money because they underestimate how fast leverage can drain an account.
Your broker sets a margin requirement — the minimum amount of cash you must keep in your account to hold open positions. If your account balance falls below this threshold, the broker will close your positions automatically, even if you do not want them closed. This is called a margin call.
Bid-ask spreads and the cost of trading
When you look up a currency pair price, you actually see two prices: the bid (what the broker will pay you if you sell) and the ask (what you must pay if you buy). The difference between them is the spread. On a major pair like EUR/USD, the spread might be 0.0002 (two pips). On an exotic pair, it could be 10 times larger.
The spread is how brokers make money. You pay it every time you open a trade, whether you win or lose. A tight spread (small difference) is cheaper; a wide spread (large difference) eats into your profits faster. Spreads widen during low-volume hours and when major economic news is released, because fewer traders are willing to take the other side of your trade at a predictable price.
What moves forex prices
Currency values change based on economic data, interest rates, and geopolitical events. When the US Federal Reserve raises interest rates, the dollar typically strengthens because investors want to hold dollars to earn higher returns. When a country's economy shrinks, its currency usually weakens. Political instability, trade wars, and central bank announcements can move prices in seconds.
Economic calendars published by financial news sites list the dates and times of major data releases — jobs reports, inflation figures, GDP growth, and central bank decisions. Traders watch these dates because prices often spike when the actual number differs from what the market expected. A surprise strong jobs report can send the dollar up 1 percent in minutes.
The difference between spot trades and forwards
A spot trade is the standard forex trade most retail traders use. You buy or sell a currency pair at today's market price, and settlement happens in two business days. The price you see is the current market rate.
A forward is a contract to exchange currencies at a set price on a future date — 30 days, 90 days, or a year from now. Forwards are used mainly by businesses that need to lock in a price for a future payment, like an importer who knows they will owe euros in three months. The forward price is higher or lower than the spot price depending on the interest rate difference between the two currencies.
How to read a forex quote
A forex quote looks like this: EUR/USD 1.0850/1.0852. The pair name comes first. The bid price (1.0850) is what you receive per euro if you sell. The ask price (1.0852) is what you pay per euro if you buy. The spread is 0.0002, or 2 pips.
A pip is the smallest unit of price movement in forex. For most pairs, one pip equals 0.0001. For pairs involving the Japanese yen, one pip equals 0.01 because the yen is worth less than other major currencies. If EUR/USD moves from 1.0850 to 1.0851, that is a one-pip move. Traders measure profit and loss in pips.
Frequently Asked Questions
Can I trade forex with a small amount of money?
Yes. Most brokers allow you to open an account with $100 or less. Leverage lets you control large positions with a small deposit. However, small accounts are also wiped out quickly if trades move against you. Many traders lose their entire deposit within weeks.
What is the difference between forex and stocks?
Stocks represent ownership in a company; forex is currency exchange. Stocks trade on centralized exchanges during set hours; forex trades over the counter 24 hours a day. Stocks are influenced by company earnings; currencies are influenced by interest rates and economic data. Leverage is much higher in forex.
Do I actually receive the currency when I buy it?
Not usually. Most retail traders close their positions before settlement, so they never take physical delivery. If you hold a position past the settlement date, your broker converts it to cash or rolls it forward to the next settlement date. Physical currency delivery is rare for retail traders.
What happens if my broker goes out of business?
This depends on your broker's country of regulation. Brokers regulated in the US, UK, or EU must segregate customer funds from company funds, so your money is protected even if the broker fails. Brokers in unregulated jurisdictions offer no such protection. Always check your broker's regulatory status before depositing money.
How much can I make trading forex?
There is no fixed amount. Profits depend on how much you risk per trade, how often you trade, and whether your predictions are correct. Some traders make 5 percent per month; others lose 50 percent in a week. Leverage magnifies both outcomes. Most retail traders lose money over time.