Forex introduction

How trading forex actually works

3 min

At its simplest, trading forex is taking a view on whether one currency will rise or fall against another, and putting money behind that view.

The mechanics

  1. You choose a pair, for example GBP/USD.
  2. You decide a direction: buy (long) if you think the British pound will strengthen against the dollar, or sell (short) if you think it will weaken.
  3. You choose a size for the position.
  4. You ideally set an exit plan — a level to take profit and a level to cut losses.
  5. When you close the position, your profit or loss is the difference between the entry and exit rates, multiplied by your size.

A quick example

Suppose GBP/USD is trading at 1.2500 and you buy, expecting the pound to rise. If the rate moves to 1.2600 and you close, you captured 100 pips of gain (we define pips precisely later). If instead it fell to 1.2450, you closed at a 50-pip loss.

What you are really betting on

Currency moves are driven by interest rates, inflation, economic growth, political stability and market sentiment. A country that raises interest rates often sees its currency strengthen, because higher rates attract capital. The rest of this track gives you the vocabulary and tools to read those forces.

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Risk disclaimer

This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.