Foreign Exchange Market · Risk, Reward & Key Concepts
Forex (Foreign Exchange) is the global market where currencies are bought and sold against each other. Unlike stocks, there is no central exchange — trading happens over-the-counter (OTC) between banks, brokers, and individual traders worldwide.
Daily trading volume
$7.5T
Larger than all stock markets combinedMarket hours
24/5
Mon–Fri, across global sessionsYou always trade one currency against another. The first is the base, the second is the quote currency.
| Pair | Name | Type | Typical Spread |
|---|---|---|---|
| EUR/USD | Euro / US Dollar | Major | 0.1–0.3 pips |
| GBP/USD | Pound / US Dollar | Major | 0.3–0.5 pips |
| USD/JPY | US Dollar / Yen | Major | 0.1–0.3 pips |
| EUR/GBP | Euro / Pound | Minor | 0.5–1.0 pips |
| USD/ZAR | Dollar / Rand | Exotic | High spread |
You think the base currency will rise. Example: buy EUR/USD at 1.0800, price rises to 1.0850 → profit of 50 pips.
You think the base currency will fall. Example: sell EUR/USD at 1.0800, price falls to 1.0750 → profit of 50 pips.
Pip = the smallest price movement. For EUR/USD: 1 pip = 0.0001. On a standard lot ($100,000), 1 pip = $10.
Forex is one of the highest-risk retail investments. Understanding each risk type is essential before trading.
Prices can move against your position rapidly due to economic news, political events, or market sentiment.
Brokers offer leverage up to 500:1. A 0.2% adverse move on 500:1 leverage = 100% loss of your margin.
During low liquidity periods, your order may fill at a worse price than expected.
Unregulated brokers may not execute orders fairly or may become insolvent. Always use a regulated broker.
⚠️ Studies show 70–80% of retail forex traders lose money. Leverage is the #1 reason.
Pip profit example
$500
50 pips × $10/pip (1 lot)Leverage amplification
100×
$1,000 controls $100,000Market hours/year
~5,200
More opportunities vs stocksBecause forex runs 24/5 and pairs move constantly due to global events, short-term traders (scalpers, day traders) and long-term position traders can both find opportunities.
Risk:Reward Ratio — Professional traders target at least 1:2 (risk $100 to make $200). Never risk more than 1–2% of your account on a single trade.
| Tool | What it does | Importance |
|---|---|---|
| Stop Loss | Automatically closes trade at a set loss level | Critical |
| Take Profit | Locks in gains at a target price | Essential |
| Position Sizing | Limits % of capital per trade | Critical |
| Trailing Stop | Moves stop loss as price moves in your favour | Useful |
| Hedging | Opens opposite position to offset risk | Advanced |
Volatility and liquidity vary across sessions. The highest activity occurs when two sessions overlap.
⭐ Best time to trade: London–New York overlap (13:00–17:00 GMT) — highest liquidity and tightest spreads.
| Term | Meaning |
|---|---|
| Pip | Smallest price movement (0.0001 for most pairs) |
| Lot | Trade size: Standard=100k, Mini=10k, Micro=1k units |
| Spread | Difference between buy (ask) and sell (bid) price — broker's fee |
| Margin | Deposit required to open a leveraged position |
| Leverage | Borrowing to control a larger position (e.g. 100:1) |
| Swap / Rollover | Interest paid/earned for holding a position overnight |
| Slippage | Fill price differs from expected price during fast markets |
| Margin Call | Broker demands more funds or closes your trade due to losses |
⚠️ Disclaimer: Forex trading carries substantial risk of loss and is not suitable for all investors. Never trade money you cannot afford to lose. Past performance does not guarantee future results.