As mentioned above, forex trading is the process of exchanging one currency for another. A trader will buy one currency while simultaneously selling another currency.
Let’s take the GBP/USD as an example again; if a trader believes the price of GBP will rise against USD, they’ll open a long (buy) position by buying GBP. If they believe the price of GBP will fall against USD, they’ll open a short (sell) position.
Currencies are always traded in pairs, as seen above, with the first being the base currency and the second the quote currency.
Now, the forex market doesn’t have a centralised marketplace like the stock market. Instead, it’s all done electronically over the counter (OTC).
Every trade taking place in the forex market is done through a network of computers between traders all over the world.
The forex trading hours are open 24 hours a day, five days a week, and the reason for this is that the FX market follows the time zones of main financial capitals such as Sydney, Tokyo, London, and New York.
Every market overlaps each other until it gets to the New York session. The Sydney session coincides with the Tokyo session, the Tokyo session then coincides with the London session, and the London session overlaps with the New York session.
![Forex marketing sessions](https://images.prismic.io/tnfev2/da050a64-cfb1-45ef-bdbe-b5d530c08599_img1+What+is+Forex+Trading+Bodyimg+1500x1000+Article.png?auto=compress%2Cformat&fit=max&w=3840)
As a result, the forex market can be pretty volatile during overlapping sessions, meaning rapid price changes occur regularly.
This is just a small fraction of how the overall forex market works; there are many more factors involved, and below, you’ll see those factors explained in detail to give you a better overview.
What is leverage in forex trading?
Leverage allows traders to gain greater exposure to the market by using less of their own capital. Leverage trading is done through derivative products such as spread betting or CFDs.
Leverage trading works by ‘borrowing’ a certain amount of funds from the broker to open a position together with a trader’s initial capital deposit. This allows them to control a bigger position with less money.
The forex market allows traders to trade with more leverage compared to other financial markets.
Trading with leverage can magnify profits or losses. This is because the profits or losses a trader might obtain are calculated on the overall size of the trade and not just their initial deposit size.
For this reason, trading with leverage might have to be done with caution, as it’s possible a trader could lose more than their initial deposit.
![What is leverage in forex trading](https://images.prismic.io/tnfev2/22702465-c962-4103-8534-bc50e0186521_img2+What+is+Forex+Trading+Bodyimg+1500x1000+Article.png?auto=compress%2Cformat&fit=max&w=3840)
What is a spread in forex trading?
The spread in forex trading refers to the difference between a currency pair's ask (buy) and bid (sell) price. With currency pairs, there are always three amounts to look out for. The first one is the ask (buy) price, which is the price at which a trader opens a buy position.
The second is the bid (sell) price, which is the price at which a trader opens a short (sell) position.
The price in the middle is the spread; this price difference is more commonly known as the bid-ask spread.
In forex trading, especially with spread betting, you don’t pay commission on your open trades, so the spread is one of the ways a forex broker makes their money from traders.
![What is a spread in forex trading](https://images.prismic.io/tnfev2/25bcdeaf-19fb-452e-aa07-4fdc713763d5_img3+What+is+Forex+Trading+Bodyimg+1500x1000+Article.png?auto=compress%2Cformat&fit=max&w=3840)
What is a lot size in forex?
In forex trading, lots are units to measure the standard size of a forex trade. The reason behind lots is that price movements within forex are generally small; lots are used to increase the value of a pair when trading. There are four different types of lots traders have access to.
- Standard lot: These are 100,000 units of base currency
- Mini lot: These are 10,000 units of base currency
- Micro lot: These are 1000 units of base currency
- Nano lot: These are 100 units of base currency
![What is lot size in trading](https://images.prismic.io/tnfev2/68e46f5a-2ac6-4267-ac28-80818a442671_img4+What+is+Forex+Trading+Bodyimg+1500x1000+Article.png?auto=compress%2Cformat&fit=max&w=3840)
What is a pip in forex?
A pip is a single unit of price movement for a currency pair. The measurement occurs at the fourth decimal place within the price. Let’s say GBP/USD is trading at $1.5485, and it moves up to $1.5486. It has moved one pip. However, if it moves from $1.5485 to $1.5585, it has moved up 100 pips.
Pip movements are the same throughout every currency pair except for pairs with JPY as the quote currency. This is because the value of the Japanese yen is much less than other major currencies.
So, instead of a single pip movement occurring at the fourth decimal place, in JPY pairs, it’s the second number after the decimal point. For example, USD/JPY trades at $135.88; a single pip movement upwards will place it at $135.89.
![what is a pip in forex trading](https://images.prismic.io/tnfev2/31085ef7-e6ad-40be-8bb4-3ca48c86e06e_img5+What+is+Forex+Trading+Bodyimg+1500x1000+Article.png?auto=compress%2Cformat&fit=max&w=3840)
What is a margin in forex?
Margin goes hand-in-hand with leverage. Margin is the amount required to open a position through leverage. The trader’s preferred broker usually states margin requirements as an amount or percentage. The margin requirements will differ depending on the amount of leverage available.
If a trader experiences a certain amount of concurring losses, the broker will send them a margin call. This notification states that the trader’s margin has dropped below the required margin level.
To correct the situation, a trader will need to add more funds to their account or risk having all their open trades closed automatically by the broker.
Margin level determines the health of a trader’s account according to their used margin. If they have a high margin level, they have a healthy account. However, they might be more at risk if they have a low margin level.
![what is margin in forex trading](https://images.prismic.io/tnfev2/d299b44d-a607-42ab-9a94-ca58db23257f_img6+What+is+Forex+Trading+Bodyimg+1500x1000+Article.png?auto=compress%2Cformat&fit=max&w=3840)
What is base and quoted currency?
As previously stated, currencies are always traded in pairs. The first currency is known as the base currency, and the second currency is the quoted currency.
The first currency (base currency) will always equal one, while the second (quote currency) will show the amount needed to buy one base currency.
Let’s look at the example of GBP/USD. GBP is the base currency, and USD is the quote currency. If this pair is trading at 1.5685, it means if a trader wants to buy £1, they’ll need $1.5685.
![Base and quote currency explained](https://images.prismic.io/tnfev2/b0eb8a2b-cb15-486b-892e-0b210963d521_img7+What+is+Forex+Trading+Bodyimg+1500x1000+Article.png?auto=compress%2Cformat&fit=max&w=3840)