What you are actually trading
The foreign exchange market is where one currency is priced against another. It has no central exchange and no trading floor. It is decentralised and over-the-counter, meaning it runs as a network of banks, brokers and liquidity providers quoting prices to each other electronically. Because that network spans time zones, currency prices move around the clock from Sunday evening to Friday evening.
What your broker gives you access to is not the underlying currency. It is a contract for difference, a CFD: an agreement between you and the broker to settle the difference in an instrument's price between the moment you open a position and the moment you close it. If the price moves your way, the broker pays you the difference. If it moves against you, you pay it.
So you never take delivery of euros, of a barrel of oil, or of a share. You are taking a position on a price. That is what makes it possible to profit from a falling market as easily as a rising one, and it is also what makes it possible to lose more than the money you set aside for the trade.
Beyond currency pairs, most brokers on this platform also quote CFDs on stock indices, commodities such as gold and oil, individual shares, and in many cases crypto. The mechanics below apply to all of them. Only the units and the pricing conventions change.
How a quote works
A currency pair is written as EUR/USD. The first currency is the base, the second is the quote. The number tells you how much of the quote currency it takes to buy one unit of the base. EUR/USD 1.0850 means one euro costs 1.0850 US dollars. When the number rises, the base has strengthened against the quote. When it falls, the base has weakened.
You are never shown one price. You are shown two: the bid (what you can sell at) and the ask (what you can buy at). The ask is always the higher of the two. The gap between them is the spread, and it is the primary cost of the trade. Buy at the ask and you could only sell back at the bid, so a position starts fractionally in the red and has to cover the spread before it shows a profit. That is normal and it is not an error in the panel.
Price movement is measured in pips. For most pairs a pip is the fourth decimal place, so a move from 1.0850 to 1.0851 is one pip. For pairs quoted against the Japanese yen, prices carry two decimals and a pip is the second decimal place. Many feeds show one extra digit, the pipette, which is a tenth of a pip. 1.08505 is half a pip above 1.0850.
How much a pip is worth in money depends entirely on how big your position is. Size is expressed in lots. One standard lot is 100,000 units of the base currency; brokers also let you trade fractions of it, which is what makes the market usable with a modest balance. Your position size is simply the lot size you choose, and it is the single most important decision in any trade, more important than the entry price.
Two traders can take the identical view on the identical pair and one can be wiped out while the other barely notices the trade. The difference is position size. Get this part right and the rest of trading becomes survivable.
What one pip is worth
Lot sizes, and the money value of a single pip at each of them. The figures assume a pair quoted in US dollars, held in a US dollar account, where one pip is 0.0001.
| Lot size | Units of base currency | Value of one pip | A 40-pip move |
|---|---|---|---|
| 1.00 (standard) | 100,000 | 10.00 USD | 400.00 USD |
| 0.10 (mini) | 10,000 | 1.00 USD | 40.00 USD |
| 0.01 (micro) | 1,000 | 0.10 USD | 4.00 USD |
Illustrative arithmetic, not a broker schedule. Pip value changes when the quote currency is not your account currency, and yen pairs use a different pip convention. The minimum and maximum lot size you can trade, and the instruments available to you, are set by your broker. See Account Types.
Long, short, and a worked example
Going long means buying: you open at the ask and profit if the price rises. Going short means selling: you open at the bid and profit if the price falls. Short is not an exotic manoeuvre in this market. Because every position is a contract on a price difference, selling first and buying back later is exactly as ordinary as the reverse.
Take a concrete case. EUR/USD is quoted 1.0850 / 1.0851, a one-pip spread. You think the euro will strengthen, so you go long 0.10 lots, which is 10,000 euros of exposure. You are filled at the ask: 1.0851. At 0.10 lots each pip is worth 1.00 USD.
The instant you are filled, the position shows a small loss. You bought at 1.0851 and could only sell at 1.0850, so you are one pip, or 1.00 USD, down. That is the spread, and it is the toll for entering.
The euro strengthens and the bid reaches 1.0891. You close by selling at the bid. Your gain is 1.0891 minus your entry of 1.0851, which is 0.0040, or 40 pips. At 1.00 USD per pip that is 40.00 USD of profit, and the spread you already paid is inside that figure.
Now run the same trade with the market against you. The bid falls to 1.0811. Closing there gives 1.0811 minus 1.0851, which is minus 0.0040, or minus 40 pips: a loss of 40.00 USD. Same instrument, same size, same distance travelled, opposite sign. The arithmetic is symmetrical, and nothing about the platform tilts it in your favour.
Had you gone short instead, every sign flips: the fall to 1.0811 would have been the 40.00 USD gain and the rise to 1.0891 the 40.00 USD loss. If you had traded a full standard lot rather than 0.10, every number above multiplies by ten, and a routine 40-pip day becomes a 400.00 USD swing.
Leverage and margin, without the sales pitch
That 0.10 lot position controlled about 10,850 USD of currency. You did not need 10,850 USD in the account to open it. You needed margin: a deposit the broker holds against the position while it is open. The ratio between the two is leverage.
At 1:30 leverage the margin on that position is roughly 10,850 divided by 30, about 362 USD. At 1:100 it is about 109 USD. At 1:500 it is about 22 USD. The position, and the money it makes or loses, is identical in all three cases. Only the amount of your balance being held hostage changes.
Which is precisely the point people miss. Leverage does not increase your profit on a given position. It reduces the cash required to hold it, which tempts you into holding a larger one. The 40-pip move that made 40.00 USD is 11% of the margin at 1:30 and 180% of the margin at 1:500. In the losing direction, the same is true: a move that is an inconvenience at low leverage can close your account at high leverage.
While positions are open the panel shows three numbers that stop agreeing with each other. Balance is your settled cash and only changes when a position closes or money moves. Equity is balance plus the unrealised profit or loss on everything currently open, and it ticks with the market. Free margin is the equity not currently pledged against positions, which is what you have left to open anything new or to absorb a move against you.
When losses eat far enough into that, the broker issues a margin call, and if equity keeps falling it will close positions automatically at the stop out level to stop the account going further into deficit. This is not a punishment and it is not negotiable: it is an automatic process, it happens at whatever price the market is at that moment, and it can be a worse price than you expect in fast conditions. The maximum leverage available to you, and the margin call and stop out levels, are set by your broker. Margin covers the whole mechanism.
Leverage cuts in both directions with exactly equal force. Any account can be lost this way, and many are. Use the least leverage that lets you trade the size you have actually planned for.
Placing a trade in the panel
The order flow, start to finish. Do this on a demo account until every step is automatic, then do it live.
- 1
Pick an instrument
Choose the pair or CFD from the watchlist and open its chart. Look at the live bid and ask and the current spread before you decide anything else. A spread that is unusually wide is telling you the market is thin or a news release is imminent.
- 2
Choose the order type
A market order fills immediately at the price available now. A pending order (limit or stop) waits for a price you nominate and only fills if the market reaches it. Market gets you in; pending gets you in on your terms, or not at all. See Order Types.
- 3
Size the position
Enter the volume in lots. Do not pick a round number because it looks tidy. Work backwards: decide the money you are willing to lose on this trade, decide where the stop goes, and let those two decide the lot size.
- 4
Attach a stop loss
Set the price at which you accept the idea was wrong and want out. Place it where the setup is genuinely invalidated, not at an arbitrary round distance, and never so close that ordinary noise takes you out. See Take Profit and Stop Loss.
- 5
Attach a take profit
Set the price where you will bank the trade. It stops a winner turning into a loser while you are away from the screen, and it forces you to decide in advance what you are actually aiming for.
- 6
Review the ticket
Before you submit, read back the instrument, the direction, the volume, the stop, the target, and the margin the ticket says will be reserved. Most expensive beginner mistakes are a wrong direction or a decimal place in the volume, and both are visible right here.
- 7
Submit and confirm the fill
Send the order and check the fill price in the open positions list. In fast markets a market order can fill slightly away from the last quoted price. That is slippage, it is a property of the market rather than a fault in the panel, and it can go either way.
- 8
Manage or close
From the positions list you can move the stop, move the target, close part of the position, or close it outright. Moving a stop further away to give a loser more room is the habit that ends accounts. Moving it closer to protect a profit is not.
Risk management is the job
Entries are the part beginners obsess over and the part that matters least. Whether you are still trading in a year is decided by the rules below.
- Size every position from your risk, not your conviction. Fix the amount you are prepared to lose on one trade, often a small single-digit percentage of the balance or less, then set the lot size so that the distance to your stop equals that amount. Conviction is not a risk parameter.
- Put a stop on every trade, without exception. A position with no stop has no defined loss, which means the loss is defined by the market, and the market does not care about your balance.
- Never let one idea carry a large share of the account. No single trade should be able to do lasting damage. If losing it would change how you trade the next one, it is too big.
- Watch correlated positions. Six trades that are all really a bet on the dollar are one trade at six times the size, however different the tickets look.
- Know what is on the calendar. Rate decisions and major data releases move prices violently and widen spreads. Being in a leveraged position through one by accident is not a strategy.
- Keep a trading journal. Record the instrument, direction, size, entry, stop, target, the reason you took it, and the outcome. After thirty trades the journal will tell you something about yourself that no chart will.
- Accept losses as a running cost. A losing trade that respected your rules was a correct trade. A winning trade that broke them was luck, and luck is not repeatable.
Sessions, liquidity and why spreads change
Forex runs continuously through the working week, but it is not the same market at every hour. Volume follows the sun as the major financial centres open and close, and the depth of the order book determines how tight the spread is and how cleanly your order fills.
Asian hours
Sydney and Tokyo lead. Volume is generally lighter than later in the day, ranges tend to be narrower, and the yen and Australasian pairs are the most active. Spreads on European crosses can be wider simply because fewer people are quoting them.
European hours
London is the largest centre in this market. Liquidity rises sharply when Europe opens, spreads on the major pairs typically tighten, and moves that had been drifting often find direction.
The London and New York overlap
For a few hours the two biggest centres are open together. This is normally the deepest, fastest part of the day, and it is when most major economic data lands. Tight spreads, but also the sharpest moves.
US afternoon and the close
Once London goes home, liquidity drains out of the majors. Moves can become erratic on lower volume, and a price can travel further than the news deserves simply because there is nobody on the other side.
The daily rollover
At the broker's end-of-day cutover, liquidity briefly thins and spreads can widen noticeably for a few minutes. Positions held through it are also charged or paid swap, the financing on the leveraged amount. See Fees and Charges.
The weekend gap
The market closes on Friday evening and reopens on Sunday evening at whatever price the news of the weekend implies. A stop cannot protect you across a gap, because there was no trading in between. Position accordingly before the close.
Core terms
The vocabulary you need before your first order. Everything else can wait.
- Pip
- The standard unit of price movement. The fourth decimal place on most pairs, the second on yen pairs. Its money value depends on your position size.
- Spread
- The gap between the bid and the ask. Your main cost of entry, and it widens when liquidity is thin.
- Lot
- The unit of position size. One standard lot is 100,000 units of the base currency; mini (0.10) and micro (0.01) lots are fractions of it.
- Long / short
- Long is a buy, profiting from a rising price. Short is a sell, profiting from a falling price. Both are equally normal in a CFD market.
- Leverage
- The ratio between the exposure you control and the margin you post. It magnifies gains and losses in exactly the same proportion. The maximum is set by your broker.
- Margin
- The part of your balance the broker holds against an open position. It is not a fee: it is returned when the position closes.
- Equity
- Balance plus the unrealised profit or loss on your open positions. This is the number that actually moves in real time.
- Free margin
- The equity not currently tied up as margin. What is left to open new positions and to absorb a move against you.
- Margin call and stop out
- The warning level, and the automatic level at which the broker starts closing positions to stop the account going into deficit. Both are set by the broker.
- Swap
- The financing charged or paid on a leveraged position held past the daily rollover. It can be negative or positive depending on the instrument and direction.
- Slippage
- The difference between the price you expected and the price you were filled at. Common in fast or thin markets, and it can help or hurt.
- Drawdown
- The fall from a peak in your equity to the trough that follows. The honest measure of what a strategy actually costs to hold.