What Is Forex Trading?
Forex (foreign exchange) trading is the buying and selling of currencies. It is the largest financial market in the world, with over $7 trillion traded daily. When you exchange money at an airport or a bank — swapping dollars for euros before a trip — you are participating in the forex market at the most basic level. Traders do the same thing, but with the goal of profiting from changes in exchange rates.
In online forex trading, you speculate on whether one currency will rise or fall against another. If you believe the Euro will strengthen against the US Dollar, you buy EUR/USD. If it rises, you profit. If it falls, you lose. The amount you gain or lose depends on how far the price moves and how much you traded.
Currency Pairs Explained
In forex, currencies are always traded in pairs. You are simultaneously buying one currency and selling another. A currency pair is written as BASE/QUOTE:
- EUR/USD — Euro (base) vs US Dollar (quote). The price tells you how many USD it costs to buy 1 EUR.
- GBP/USD — British Pound vs US Dollar
- USD/JPY — US Dollar vs Japanese Yen
- AUD/USD — Australian Dollar vs US Dollar
If EUR/USD is quoted at 1.0850, it means 1 Euro costs 1.0850 US Dollars. If the price rises to 1.0900, the Euro has strengthened against the Dollar.
Major, Minor, and Exotic Pairs
- Major pairs — Include the USD on one side (EUR/USD, GBP/USD, USD/JPY, etc.). These are the most liquid, with the tightest spreads.
- Minor pairs — Do not include USD but involve major currencies (EUR/GBP, GBP/JPY, etc.). Slightly less liquid.
- Exotic pairs — One major currency paired with a currency from an emerging economy (USD/TRY, EUR/ZAR). Less liquid, wider spreads, more volatile.
For beginners, start with major pairs — particularly EUR/USD, which is the most liquid forex pair in the world with tight spreads and well-documented behaviour.
What Is a Pip?
A pip (percentage in point) is the smallest standard price movement in a currency pair. For most pairs, one pip = 0.0001 (the fourth decimal place).
Example: If EUR/USD moves from 1.0850 to 1.0860, that is a 10-pip movement.
For JPY pairs (like USD/JPY), one pip = 0.01 (the second decimal place), because JPY is quoted to fewer decimal places.
Understanding pips is important because profits and losses in forex are measured in pips, and the value of each pip depends on your trade size (lot size).
What Is a Lot?
A lot is the standard unit of measurement for trade size in forex:
- Standard lot = 100,000 units of the base currency
- Mini lot = 10,000 units
- Micro lot = 1,000 units
- Nano lot = 100 units
For a standard lot on EUR/USD, each 1-pip movement = approximately profit or loss. For a micro lot, each pip = approximately /bin/zsh.10.
Beginners should trade micro or nano lots to minimise risk while learning.
What Is Leverage?
Leverage allows you to control a large trade position with a relatively small amount of capital. With 100:1 leverage, you control ,000 of currency with ,000 of your own money.
Leverage amplifies both profits and losses proportionally. This makes it one of the most dangerous aspects of forex trading for beginners.
Example with 100:1 leverage:
You deposit ,000 and trade 1 standard lot of EUR/USD (controlling ,000).
A 1% adverse move (100 pips) = a ,000 loss — your entire deposit — in a single trade.
This is why strict position sizing and stop-losses are non-negotiable in forex trading. Always use the minimum leverage available to you when starting out.
How Forex Profits and Losses Are Calculated
Profit/Loss = Number of Pips × Pip Value × Number of Lots
Example: You buy 1 micro lot of EUR/USD (1,000 units). Price moves 20 pips in your favour. Pip value for 1 micro lot on EUR/USD ≈ /bin/zsh.10.
Profit = 20 pips × /bin/zsh.10 = .00
Small as it sounds, this is appropriate for a learning stage. As your account grows and your strategy proves itself, lot sizes scale accordingly.
Key Drivers of Forex Markets
Unlike synthetic indices, forex prices reflect real-world supply and demand for currencies, which is influenced by:
- Interest rates — Higher interest rates attract foreign investment, strengthening a currency. Central bank decisions (Federal Reserve, ECB, Bank of England) are major market movers.
- Economic data — GDP, inflation (CPI), employment data, retail sales. Strong data typically strengthens a currency.
- Political events — Elections, trade agreements, geopolitical tensions can cause significant volatility.
- Market sentiment — Risk-on (investors buying riskier assets, selling safe havens) vs risk-off (buying USD, JPY, CHF as safe havens).
Forex vs Binary Options: Which to Start With?
Both instruments have their place. Forex offers flexible position management (stop-losses, take-profits, scaling) and the potential for larger gains on well-managed trades. Binary options offer fixed risk per trade and simpler mechanics.
Many traders start with binary options on Deriv because the fixed-risk structure is forgiving while learning, then progress to spot forex as they develop more advanced skills. Neither is universally better — it depends on your personality, schedule, and goals.
Getting Started Safely
- Open a demo account on a regulated platform (Deriv offers both forex and binary options on demo)
- Start with EUR/USD on a 5-minute chart
- Learn to read basic price action and candlestick patterns
- Practice placing, modifying, and closing trades without real money pressure
- Keep a trading journal from your first demo trade
- Only consider a live micro account after 50-100 demo trades with consistent positive results
About the Author
Bretton Gitonga — trading educator and founder of Money8gg. Years of hands-on experience with binary options and forex on Deriv. Contact Bretton.
