Forex explained: a guide to currencies, brokers and risk
Foreign exchange affects the price of a holiday, an international invoice and an overseas investment. It is also the basis for products offered by online brokers. These activities are related, but they are not the same: converting money for a purchase is different from speculating on an exchange rate with leverage. This guide explains the terminology behind the comparison above and the questions worth asking before opening an account.
What is forex?
Forex, or foreign exchange, is the market in which one currency is exchanged for another. A currency pair expresses the price of the first currency in units of the second. For example, if EUR/USD is 1.1000, one euro is quoted at 1.10 US dollars. The price can move as buyers and sellers respond to changes in economic expectations, interest rates and demand for currencies.
There is no single global forex exchange setting one universal price. Banks and other institutions transact through a network of trading venues and counterparties. Retail products may reference this wider market, but their prices, execution and contractual terms depend on the particular provider. A quote shown by one broker is not a promise that another broker will offer exactly the same price.
Why do people and institutions exchange currencies?
Companies pay suppliers and employees in different countries, investors buy overseas assets, and travellers need local money. Banks provide liquidity and manage their own exposures. An exporter may use a currency contract to reduce uncertainty about a future payment; a speculator, by contrast, accepts currency risk in the hope of benefiting from a price change. Neither purpose removes the possibility of losses.
Online traders usually do not need to receive physical notes or use the currency abroad. Many take a position in a rolling spot contract or CFD whose value depends on a quoted exchange rate. Whether the instrument delivers currency or settles a price difference depends on its legal terms. Always read the product description instead of assuming that a trading account works like a bank account.
How to read a currency pair
| Term | Meaning | Illustration |
|---|---|---|
| Base currency | The first currency in a pair | EUR in EUR/USD |
| Quote currency | The currency in which the price is expressed | USD in EUR/USD |
| Bid | The quoted price at which you can sell the base currency | 1.1000 |
| Ask | The quoted price at which you can buy the base currency | 1.1002 |
| Spread | The difference between ask and bid | 0.0002, or two pips in this example |
Going long means taking a position that benefits if the quoted price rises, before costs; going short means taking the opposite exposure. For most major pairs a pip is 0.0001, while pairs quoted with the Japanese yen commonly use 0.01. Quoting conventions vary, so check the instrument specification. A pip is a price increment, not a fixed cash amount: its value depends on position size and account currency.
Who participates and when is the market open?
Participants include central and commercial banks, investment funds, payment providers, businesses and individuals. Institutional activity takes place across financial centres including London, New York, Singapore and Tokyo. Overlapping business hours can bring more activity, but liquidity is not constant and can deteriorate around news, holidays or market closures.
Currency trading is commonly available around the clock on weekdays, but a broker's actual schedule depends on the product, holidays and server time. Some instruments have breaks; spreads may widen near the daily rollover or reopening after a weekend. Orders may not execute at the last displayed price when trading resumes. Check the specific instrument's hours before relying on a schedule.
What moves exchange rates?
- Interest rates and expectations: changes in actual or expected monetary policy can alter demand for currencies.
- Economic data: inflation, employment and growth reports can change expectations, particularly when results differ from forecasts.
- Political and geopolitical events: elections, sanctions, conflict and policy announcements can trigger sudden repricing.
- Market liquidity and sentiment: demand for safer assets, large orders and thin trading can affect the speed and size of price moves.
No individual indicator reliably predicts the next move. Markets can react to what investors expected, rather than to whether a headline looks positive in isolation. Economic calendars help identify scheduled announcements but cannot forecast unexpected events or guarantee execution at a desired price.
What does a forex broker do?
A broker or dealer provides access to products, quotes, an account and a trading platform. In retail OTC trading, the firm or another designated entity may be your contractual counterparty. This differs from trading a standardised currency future on an exchange with central clearing. Order routing, execution method, conflicts of interest and the handling of client money should be explained in the broker's documents.
A familiar brand may operate through several legal entities. The entity opening your account determines the agreement and often the applicable regulator, complaint process and protections. A licence held by another company in the same group does not automatically protect your account. Verify the exact company name, website and authorisation in the relevant regulator's public register.
Spread, commission and other costs
A narrow advertised spread is only one part of the total cost. Spreads can be variable, and a minimum shown in a comparison is not the price available on every order. Some accounts charge a separate commission, often per lot and sometimes separately for opening and closing. Check whether a quoted amount is per side or for a complete round trip and which currency it uses.
| Cost | What to check |
|---|---|
| Spread | Typical, not just minimum, spread for the relevant instrument and time |
| Commission | Rate, unit, account currency and whether it applies on each side |
| Overnight financing | Long and short rates, rollover time, weekends and exceptions |
| Other charges | Deposit, withdrawal, currency conversion, inactivity and platform fees |
For a simple illustration, a two-pip spread on 10,000 units of EUR/USD is approximately $2 when the account is denominated in US dollars: one pip is approximately $1 for that position size. This excludes commission, conversion, financing and slippage. The figures are illustrative, not a broker quote; actual contract specifications and costs may differ.
Leverage and margin: a worked example
Leverage lets a trader control a position larger than the margin set aside. At 10:1 leverage, a position with a notional value of $10,000 requires approximately $1,000 of margin, before broker-specific adjustments. If the position moves 1% against the trader, the loss is approximately $100 before costs: about 10% of the illustrative margin. A 1% favourable move gives an equivalent gross gain.
Margin is collateral, not the maximum amount that can be lost. The account's equity changes with open profit and loss. If equity falls below a broker's thresholds, the firm may require more funds or close positions automatically. Fast markets and price gaps can cause execution beyond the level expected. Negative balance protection, where available, has conditions and differs by entity, product and jurisdiction.
Lot size, orders and execution
Position size determines how much each price movement is worth. A standard forex lot often represents 100,000 units of the base currency, with smaller mini and micro lots available on many platforms. Contract sizes can differ by instrument and broker. Before submitting an order, check the quantity, notional exposure, required margin and potential loss under several price scenarios.
A market order generally seeks immediate execution at the available price; the final price can differ from the quote. A limit order specifies a price or better but may never execute. A stop order triggers an instruction when a level is reached; unless a provider explicitly offers a guaranteed stop under stated terms, the execution price can differ, especially during gaps. Availability and rules depend on the broker.
How to compare brokers in the table
- Confirm eligibility: a listing in a regional category does not guarantee that an entity accepts residents of your country or may offer them the product.
- Check authorisation: find the exact legal entity and website in the regulator's register. Check warnings and restrictions separately.
- Compare the full account: examine typical spread, commissions, financing, minimum deposit, platform and withdrawal terms for the same product and account type.
- Inspect protections: look for segregation of client money, complaint routes, compensation arrangements and negative balance terms where they apply.
- Review evidence: read original documents and independent sources. A rating is a starting point, not proof of a licence or a guarantee of fair treatment.
Regulatory standards and protections are not identical across countries. A company registered in a jurisdiction is not necessarily licensed there to provide the service you intend to use. Check authorisation status and the services covered, rather than relying on a flag or a licence number alone. The table may change and can contain incomplete information, so verify current terms with the provider and regulator.
How to recognise warning signs
Be cautious of guaranteed returns, pressure to deposit immediately, unsolicited investment offers and requests to install remote-access software. An attractive dashboard is not evidence that funds are held safely. Be especially alert when someone asks you to borrow money, deposit only in crypto, pay a supposed tax before withdrawal, or continue sending money to recover previous losses.
Search the regulator's register and warning list using the exact legal name, domain and contact details. Fraudsters sometimes impersonate authorised firms, so a matching name alone is insufficient. If you suspect fraud, stop sending money, save records and contact your payment provider and the relevant regulator or law-enforcement authority. Rules and available remedies vary by location.
Demo accounts and getting started
A demo account can help you learn the platform, practise order types and inspect contract specifications without placing real funds at risk. It cannot reproduce every feature of live trading: liquidity, slippage, pricing, execution and emotions may differ. Do not treat a demo profit as evidence that a strategy will work or that a provider is authorised.
Before deciding whether to use any product, read the risk disclosure and fee schedule, understand the maximum exposure and possible loss, and check whether the service is permitted in your location. Decide in advance how you would close a position and what happens if the platform is unavailable. You can also decide that the product is unsuitable and choose not to trade.
Common questions
Is forex the same as a CFD?
No. Foreign exchange is the broader activity of exchanging currencies. A forex CFD is a derivative linked to a currency pair; its settlement and terms are specified by the provider. Other forex products and physical currency conversion work differently.
Can I lose more than my deposit?
It depends on the contract and the protections applicable to your entity and account. Without effective negative balance protection, losses can exceed deposited funds. Even where protection applies, check its scope and exceptions.
Does a low minimum deposit mean low risk?
No. Risk depends on position size, leverage, market movements, costs and protections, not just the amount needed to open an account. A small deposit can support a much larger exposure.
Does regulation eliminate the risk of fraud or loss?
No. Authorisation provides a framework of rules and supervision, but it does not guarantee profitability or eliminate counterparty, market or operational risk. Verify the exact firm and contract directly.
Are all brokers available in every country?
No. Availability depends on the provider, legal entity, client residency, product and local rules. A category or flag in a comparison does not establish that an offer is legal or available to you.