Forex Basics — Complete Guide
Complete beginner guide to Forex trading. Learn currency pairs, pips, lots, spread, leverage, margin, order types, and how the forex market works.
What is Forex Trading?
Forex (Foreign Exchange) is the global marketplace for trading currencies. It's the largest and most liquid financial market in the world, with daily trading volume exceeding $7.5 trillion. Unlike stock markets, forex operates 24 hours a day, 5 days a week.
When you trade forex, you're simultaneously buying one currency and selling another. Currencies are always traded in pairs — for example, EUR/USD means you're trading the Euro against the US Dollar.
Forex is the most accessible market for retail traders because of 24/5 availability, high liquidity, low barriers to entry, and the ability to profit in both rising and falling markets.
How the Forex Market Works
Market Participants:
| Participant | Role | Volume |
|---|---|---|
| Central Banks | Monetary policy, currency reserves | Largest |
| Commercial Banks | Interbank trading, client orders | Very Large |
| Hedge Funds | Speculation, algorithmic trading | Large |
| Corporations | International trade hedging | Medium |
| Retail Traders | Individual speculation | Small (~5%) |
Market Structure:
The forex market is decentralized (no central exchange). It operates through a global network of banks, brokers, and electronic trading platforms. This is called the Over-The-Counter (OTC) market.
Currency Pairs Explained
Types of Currency Pairs:
Major Pairs (Most Traded):
| Pair | Name | Spread (Typical) |
|---|---|---|
| EUR/USD | Euro/Dollar | 0.6-1.0 pips |
| GBP/USD | Cable | 0.8-1.5 pips |
| USD/JPY | Dollar/Yen | 0.7-1.2 pips |
| USD/CHF | Dollar/Swiss | 1.0-1.8 pips |
| AUD/USD | Aussie | 0.8-1.4 pips |
| USD/CAD | Loonie | 1.0-1.8 pips |
| NZD/USD | Kiwi | 1.2-2.0 pips |
Minor Pairs:
EUR/GBP, EUR/JPY, GBP/JPY, AUD/JPY, etc. (Don't include USD)
Exotic Pairs:
USD/TRY, USD/ZAR, EUR/TRY, etc. (Include one major + one emerging market currency. Higher spreads.)
Base and Quote Currency:
In EUR/USD = 1.0900:
- EUR = Base currency (what you're buying/selling)
- USD = Quote currency (the price)
- The price means: 1 EUR = 1.0900 USD
Understanding Pips
A pip (Percentage in Point) is the smallest standard price movement in forex:
- For most pairs: 4th decimal place (0.0001)
- For JPY pairs: 2nd decimal place (0.01)
Examples:
- EUR/USD moves from 1.0900 to 1.0910 = +10 pips
- USD/JPY moves from 150.00 to 150.50 = +50 pips
- GBP/USD moves from 1.2700 to 1.2685 = -15 pips
Pipettes:
Some brokers show a 5th decimal (0.00001). This is a pipette = 1/10th of a pip.
Pip Value:
The monetary value of one pip depends on your lot size:
| Lot Size | Units | Pip Value (USD pairs) |
|---|---|---|
| Standard (1.0) | 100,000 | $10 per pip |
| Mini (0.1) | 10,000 | $1 per pip |
| Micro (0.01) | 1,000 | $0.10 per pip |
Lot Sizes & Position Sizing
What is a Lot?
A lot is the standardized unit of measurement for trade size:
- Standard Lot = 100,000 units of base currency
- Mini Lot = 10,000 units (0.10 lot)
- Micro Lot = 1,000 units (0.01 lot)
Position Sizing Formula:
Position Size = (Account Risk $) ÷ (Stop Loss in pips × Pip Value)
Example:
- Account: $10,000
- Risk: 1% = $100
- Stop Loss: 20 pips
- Pip Value: $10 (standard lot)
Position Size = $100 ÷ (20 × $10) = 0.50 lots
Never risk more than 1-2% of your account on a single trade. This ensures you can survive a streak of losses and continue trading.
Spread & Commission
What is Spread?
The spread is the difference between the Bid (sell price) and Ask (buy price). It's the broker's primary way of earning revenue.
- Bid: The price at which you can SELL
- Ask: The price at which you can BUY
- Spread = Ask - Bid
Example: EUR/USD Bid: 1.0900 / Ask: 1.0901 → Spread = 1 pip
Types of Spreads:
| Type | Description | Best For |
|---|---|---|
| Fixed | Stays the same regardless of conditions | Beginners |
| Variable | Changes based on market liquidity | Active traders |
| Raw/ECN | Near-zero spread + commission | Professional |
Commission:
Some brokers charge a separate commission per trade (e.g., $3.50 per lot per side) in addition to tight spreads.
Leverage & Margin
What is Leverage?
Leverage allows you to control a larger position with a smaller amount of capital. It's expressed as a ratio:
| Leverage | Margin Required | $10,000 Controls |
|---|---|---|
| 1:10 | 10% | $100,000 |
| 1:50 | 2% | $500,000 |
| 1:100 | 1% | $1,000,000 |
| 1:500 | 0.2% | $5,000,000 |
Margin:
Margin is the deposit required to open and maintain a leveraged position.
- Used Margin: Amount locked for open positions
- Free Margin: Available for new trades
- Margin Level: (Equity ÷ Used Margin) × 100%
- Margin Call: When margin level drops below broker's threshold (typically 50-100%)
Leverage amplifies both profits AND losses. A 1:100 leverage means a 1% move against you = 100% of your margin lost. Use leverage conservatively — professional traders rarely exceed 1:10 effective leverage.
Order Types
Market Order
Executes immediately at the current market price. Use when you want to enter NOW.
Limit Order
Executes at a specific price or better:
- Buy Limit: Buy BELOW current price (expecting bounce up)
- Sell Limit: Sell ABOVE current price (expecting drop down)
Stop Order
Executes when price reaches a specific level:
- Buy Stop: Buy ABOVE current price (breakout entry)
- Sell Stop: Sell BELOW current price (breakdown entry)
Stop Loss
Automatically closes your position at a predetermined loss level. Always use a stop loss.
Take Profit
Automatically closes your position at a predetermined profit level.
Trading Sessions (Bangladesh Time)
| Session | BD Time | Major Pairs |
|---|---|---|
| Sydney | 3:00 AM - 12:00 PM | AUD, NZD pairs |
| Tokyo | 5:00 AM - 2:00 PM | JPY pairs |
| London | 2:00 PM - 11:00 PM | EUR, GBP pairs |
| New York | 7:30 PM - 4:00 AM | USD pairs |
Best Trading Times (BD):
- London-NY Overlap: 7:30 PM - 11:00 PM (highest liquidity & volatility)
- Tokyo-London Overlap: 2:00 PM - 3:00 PM
Your First Trade — Step by Step
- Open a demo account with a regulated broker
- Learn the platform (MetaTrader 4/5 or cTrader)
- Analyze the pair — pick one major pair to start (EUR/USD recommended)
- Determine bias — What direction do you expect based on analysis?
- Set entry, stop loss, and take profit — Always plan before entering
- Calculate position size — Based on 1% risk maximum
- Execute the trade — Enter and don't panic
- Manage the trade — Follow your plan, don't move your stop loss wider
- Journal the trade — Record everything for review
Common Beginner Mistakes
❌ No stop loss — Every trade MUST have a stop loss. No exceptions.
❌ Risking too much — Keep risk at 1-2% per trade. Blowing accounts happens from over-risking.
❌ Over-leveraging — High leverage = fast account destruction. Start with low leverage.
❌ Trading too many pairs — Master ONE pair before adding more.
❌ No trading plan — Random entries = random (mostly negative) results.
❌ Revenge trading — After a loss, don't immediately enter another trade to "make it back."
❌ Skipping the demo — Practice for at least 3 months on demo before going live.
FAQ
How much money do I need to start forex trading?
You can start with as little as $100 with a micro account. However, $500-$1,000 is recommended for meaningful position sizing. Start with a demo account first regardless.
Is forex trading halal?
Islamic (swap-free) accounts are available that don't charge overnight interest. Consult with a knowledgeable scholar for guidance on your specific trading approach.
What is the best pair for beginners?
EUR/USD — it has the tightest spreads, highest liquidity, most predictable behavior, and moves at a moderate pace.
How much can I make from forex?
Realistic expectations: 3-10% monthly returns with proper risk management after years of practice. Most beginners lose money in their first year. Focus on learning, not earning.
Summary
| Concept | Key Points |
|---|---|
| Forex | Global currency market, $7.5T daily volume |
| Pairs | Base/Quote — EUR/USD, GBP/USD, etc. |
| Pips | 4th decimal (0.0001), 2nd for JPY |
| Lots | Standard (100K), Mini (10K), Micro (1K) |
| Spread | Bid-Ask difference = trading cost |
| Leverage | Amplifies profits AND losses |
| Risk | 1-2% per trade maximum |
| Best Time (BD) | 7:30 PM - 11:00 PM (London-NY overlap) |
Related Topics
- Risk Management — Protecting your capital
- Position Sizing — How much to risk per trade
- Trading Psychology — The mental game
- Economic Calendar — News that moves forex