What Is Forex? A Complete Guide to Currency Trading (2026)

Forex, short for foreign exchange, is the global over-the-counter (OTC) market for trading one currency against another. The foreign exchange market ranks as the largest and most liquid financial market in the world. Its average daily turnover reached roughly $9.6 trillion in April 2025, according to the BIS Triennial Central Bank Survey.

Most people have used the currency market without noticing. Anyone who swaps home currency for foreign banknotes before a trip has made a foreign exchange transaction. Traders do the same thing electronically, aiming to gain from changes in exchange rates, though prices can also move against the trader and produce losses.

Traders reach the foreign exchange market through brokers and trading platforms. The Libertex platform, operating since 2012, is an award-winning stock and CFD broker that gives access to forex trading as CFDs. The sections below explain how the market works, define the core terms, and set out the risks that every trader should weigh first, from currency pairs and pips to leverage and regulation.

Key takeaways

• Forex is the largest financial market worldwide, with about $9.6 trillion in average daily turnover in April 2025, up 28% from 2022.
• The foreign exchange market operates over-the-counter, 24 hours a day, five days a week, with no central exchange.
• The US dollar sits on one side of 89% of all forex trades, which makes EUR/USD the single most traded currency pair.
• Retail traders account for only a small share of daily turnover, while institutional flow, led by inter-dealer trading, drives most of the volume.
• Between 74% and 89% of retail CFD accounts lose money, according to ESMA.

What is forex and how does it work?

Forex trading means buying one currency while selling another at the same time. Any profit or loss comes from the change in the exchange rate between the entry price and the exit price.

Every quote in the market involves a currency pair. The first currency is the base, and the second is the quote currency. Its price shows how much of the quote currency buys one unit of the base.

For example, EUR/USD traded at 1.1460 on 18 September 2026 as an ECB reference rate. At that price, one euro costs 1.1460 US dollars. A rise in the pair means the euro is strengthening against the dollar, while a fall means the opposite.

Consider a worked example on a long position. A trader buys 1 mini lot of EUR/USD (10,000 units) at 1.1460 and closes at 1.1510. The price rose 50 pips in the trader's favour. At about $1 per pip on a mini lot, the gross gain is roughly $50, before spread and other costs.

The same mechanics work in reverse on a short position. A trader who sells the pair first profits when the price falls and buys it back lower. This two-way access is one reason currency trading stays active in both rising and falling markets.

The foreign exchange market operates OTC, 24 hours a day, five days a week, with about $9.6 trillion in daily turnover in April 2025 per BIS data. Trading follows the sun across the Sydney, Tokyo, London, and New York sessions. The London and New York sessions overlap for about four hours, when both centres trade at once and spreads on major pairs are typically tight.

Forex market structure: the OTC hierarchy

The foreign exchange market has no central exchange. It runs as a tiered OTC network of banks, brokers, and traders that sets prices continuously.

At the top sit central banks and the largest commercial banks, which trade directly in the interbank market. Below them, prime brokers, retail brokers, and liquidity providers pass prices down to smaller institutions and to individual traders. Each layer adds a small markup for access and execution.

Because trading is decentralised, quotes can differ slightly between brokers at the same moment. A regulated, tier-1 broker matters here, because oversight supports fair pricing, order execution, and segregated client money.

Currency pairs: majors, minors, and exotics

Currency pairs fall into three groups: majors, minors, and exotics. The group determines liquidity, typical spread width, and volatility.

A currency pair always has two sides. The base currency is quoted first and the quote currency second. A trader who expects the base to strengthen buys the pair, while a trader who expects it to weaken sells the pair.

Major pairs all include the US dollar, which sits on one side of 89% of all trades, and so carry the deepest liquidity. Minor pairs, also called crosses, combine two major currencies without the dollar, such as EUR/GBP or EUR/JPY. Exotic pairs match one major currency with a currency from a smaller or developing economy, such as USD/TRY or USD/ZAR.

The US dollar dominates currency trading. It sits on one side of 89% of all trades, ahead of the euro, the yen, and the pound. Every one of the top 10 most traded pairs involves the US dollar, which is why these pairs stay so liquid.

Source: BIS Triennial Central Bank Survey. 
Note: Because every trade involves two currencies, shares add up to 200%. The table shows only the four most traded currencies.

Liquidity depends on the economic links between two countries. Strong trade and capital ties tend to produce a liquid pair with a narrow spread. Weaker ties tend to produce wider spreads and demand larger price moves to cover costs.

That difference shapes strategy. Majors and many minors trade well on almost any timeframe. Exotics often suit longer holding periods, because a wider spread needs a bigger move before a position reaches breakeven.

Session timing also affects each group. Major pairs stay liquid across the London and New York sessions, which keeps their spreads tight for most of the trading day. Exotic pairs can turn thin outside their home session, so quotes widen and slippage becomes more likely. A trader who matches a pair to its most active session usually pays a lower effective cost per trade.

Essential forex terminology

Five terms define most forex trading: pip, spread, margin and leverage, lot size, and rollover. Each one directly affects the cost, exposure, or risk of a position.

What is a pip in forex?

A pip is the smallest standard price move in a currency pair. It equals 0.0001 for most pairs and 0.01 for pairs quoted in Japanese yen.

Pip value depends on lot size. On EUR/USD, one pip is worth about $10 on a standard lot, $1 on a mini lot, $0.10 on a micro lot, and $0.01 on a nano lot. For pairs that do not end in USD, the pip value depends on the current exchange rate and needs a separate calculation.

What is spread in forex?

The spread is the difference between the bid price and the ask price of a currency pair. It works as the broker's built-in cost for opening a position.

A tighter spread lowers the cost of each trade. On EUR/USD, spreads are usually narrow because the pair is the most liquid in the market. Exotic pairs carry wider spreads, which raises the move a position needs to reach breakeven. Traders often compare spreads across brokers before choosing where to trade a given pair.

Margin and leverage in forex

Leverage lets a trader control a larger position with a smaller deposit. Margin is the deposit the broker holds to open and keep that position open.

For example, consider a £1,000 deposit used at a 30:1 retail leverage. It controls a £30,000 position, so a 2% move against the trader equals a £600 loss, which is 60% of the deposit.

Leverage magnifies both gains and losses in equal measure. Careful position sizing is the main tool that keeps that magnification within a trader's risk limits.

Lot sizes and position sizing

A lot is the standard unit of trade size in forex. One standard lot equals 100,000 units of the base currency, and smaller lots scale down from there.

Position size follows a simple formula: account risk in currency, divided by the stop-loss in pips multiplied by the pip value. Smaller lots let a trader keep risk low on a modest balance. A common rule is to place no more than 1% to 2% of account capital on any single trade.

Rollover (swap) in forex

Rollover, also called swap, is the interest adjustment applied to a position held past the daily cut-off. The standard cut-off is 5:00 PM New York time.

The swap reflects the interest-rate difference between the two currencies in the pair. A position can earn or pay this amount, depending on which currency carries the higher rate. Because central bank rates change, the sign and size of the swap change with them over time.

Who trades forex? Market participants

Forex participants range from central banks to individual retail traders. Institutional flow, not retail flow, drives the bulk of daily turnover.

Inter-dealer trading between the largest banks averaged about $4.4 trillion per day in April 2025, near 46% of turnover, per BIS data. Central banks manage monetary policy and reserves. Commercial banks supply liquidity, while asset managers, hedge funds, and corporations trade to invest or to hedge currency risk.

Each group trades for a different reason. Corporations convert revenue and hedge future payments in foreign currency. Asset managers and hedge funds seek returns or manage portfolio exposure across borders. Central banks act to steady their currency or to meet a policy goal, not to speculate.

Retail traders sit at the base of this hierarchy. They make up only a small share of global turnover, far below the inter-dealer segment that leads daily volume. The gap in capital, data access, and execution speed is a realistic reason for retail traders to focus on strict risk management rather than trade size.

What moves the forex market?

Four forces move exchange rates most: central bank policy, economic data, geopolitics, and market sentiment. Interest-rate expectations usually carry the most weight of the four.

• Central bank policy: rate decisions and guidance shift a currency's yield and its demand.
• Economic data: inflation (CPI), employment (NFP), and growth figures reprice rate expectations.
• Geopolitics: conflicts, elections, and trade disputes drive risk-on and risk-off flows.
• Market sentiment: positioning and risk appetite can move prices before any data lands.

Central bank policy shows how fast this works. On 16 September 2026, the US Federal Reserve raised its target range to 3.75% to 4.00%, its first hike since 2023. A decision like this can reset a technical setup within minutes, as traders reprice the dollar against every major pair.

Data releases work the same way on a smaller scale. A surprise in inflation or employment figures can move a pair sharply in seconds. This is why many active traders check the economic calendar before opening a position.

Forex trading instruments

Forex can be traded through several instruments, each with a different settlement, cost, and typical user. The choice depends on the time horizon and purpose, from hedging to short-term speculation.

Spot and swaps make up most turnover. BIS data for April 2025 shows spot at 31% and FX swaps at 42% of global turnover, with outright forwards at 19%. Retail activity concentrates in spot and CFDs.

Contracts for difference (CFDs) are common in retail forex. A CFD tracks the price of a currency pair without transferring ownership of the underlying currency. This structure allows both long and short positions and the use of leverage.

Contracts for difference (CFDs) are complex instruments and come with a high risk of losing money rapidly due to leverage. Before trading, make sure you fully understand how they work and the associated risks, and consider whether you can afford a partial or total loss of the capital invested.

Forex trading styles

Trading styles differ mainly by holding period and screen time. The right style is a function of available time, risk tolerance, and capital. Whichever style a trader picks, ESMA treats CFDs as complex, high-risk products for retail clients.

Scalping and day trading demand near-constant attention and tight spreads. Position trading needs patience and a wider view of macroeconomic direction. Neither extreme suits every schedule or temperament.

Some traders new to the market consider swing trading. It targets medium-term price swings and needs less screen time than scalping or day trading. That balance leaves room to study the market and review each trade between positions.

Capital also shapes the choice. Short-term styles spread costs across many trades, so tight spreads and low fees matter more. Longer-term styles hold through overnight rollover, so the swap on a position becomes part of the cost. No single style is stronger than the others, and many traders test several before settling on one that fits their schedule.

Technical analysis basics

Technical analysis studies price action to time entries and exits. Fundamental analysis explains why a currency may move, while technical analysis suggests when to act on it.

Chart type shapes what a trader sees. Candlestick charts show the open, high, low, and close in a single element, which is why traders often prefer them for intraday decisions. Line charts show only closing prices, and bar charts sit between the two in detail.

Support and resistance levels mark prices where a pair has repeatedly turned. Traders watch these levels to plan entries, exits, and stop-loss placement. A break through a well-tested level can signal that momentum is shifting.

The US Dollar Index (DXY), administered by the Intercontinental Exchange (ICE), measures the dollar's value against a basket of six major currencies. A DXY break above resistance often adds confluence to a short EUR/USD idea, because a stronger dollar pressures the euro side of the pair. Used this way, indicators support a decision rather than replace the trader's own judgement.

Risks of forex trading

Forex trading carries a high risk of losing money, driven mainly by leverage, volatility, and trading costs. A single leveraged position around a news event can wipe out a large part of an account in minutes.

The regulatory record is clear on outcomes. ESMA reports that 74% to 89% of retail CFD accounts lose money, with average losses per client between €1,600 and €29,000. Those rules also require negative balance protection and a margin close-out at 50% of the required margin, so a retail client cannot lose more than the account balance.

Volatility and cost add to the risk. Spreads widen during major news, and thin liquidity can move prices faster than a stop-loss can fill. These conditions make disciplined risk management the deciding factor over the long run.

Emotion is the risk traders control least well. Most large losses follow a broken rule, such as moving a stop-loss or adding to a losing position. A fixed risk limit per trade and a written plan keep those impulses in check.

Five practices reduce avoidable risk:

• Position sizing: limiting the share of capital at risk on each trade.
• Stop-losses: set a hard exit level before entering any position.
• Leverage discipline: use less than the maximum cap on volatile pairs.
• Economic calendar: check scheduled data releases before trading.
• Trading journal: record each trade to review decisions objectively.

How to choose a forex broker

A forex broker connects retail traders to the interbank market through its OTC network. The broker's regulation, platform, and pricing decide most of the trading experience.

Regulation is the first filter. Commonly cited tier-1 regulators include the FCA, ASIC, CFTC and NFA, MAS, FINMA, BaFin, and JFSA. No single official universal tier-1 list exists, so definitions differ by source, and a trader should confirm a broker's licence directly with the regulator.

Certain signals are clear red flags:

• No verifiable registration with a recognised financial regulator.
• Marketing that promises returns or plays down the risk of loss.

Trading platforms and requirements

Platform choice affects charting, order types, and automation. MetaTrader 4 and MetaTrader 5 are widely used, and both are available on the Libertex platform. MetaTrader 5 adds more timeframes and order types than MetaTrader 4, while MetaTrader 4 remains popular for its simplicity.

Regulatory requirements protect the retail client directly. Notably, regulators may require that brokers apply a leverage cap on major pairs, keep a negative balance protection in place, and hold client funds in segregated accounts. A trader can weigh these protections alongside spreads and platform features when comparing brokers.

How to start trading forex

Starting forex trading is a step-by-step process, not a single action. Each step builds the knowledge and discipline needed before real money is at stake.

1. Learn the core terminology: pip, spread, margin, leverage, and lot size.
2. Understand market structure and who the main participants are.
3. Compare brokers by trading conditions, platform features and the jurisdiction they operate from.
4. Practise on a demo account to test ideas without financial risk.
5. Write a trading plan with fixed entry, exit, and risk rules.
6. Move to live trading with micro lots and small position sizes.
7. Review results in a journal, then refine the plan over time.

Many platforms, including Libertex, offer demo accounts at no cost, which allow practice before committing real capital. A demo account does not fully reproduce live market conditions, such as execution, slippage or the psychological pressure of trading with real money.