The foreign exchange (forex) market is the largest financial market in the world, with over $7 trillion traded daily. It's also one of the most accessible — forex brokers let you start with as little as €100. But accessibility doesn't mean easy money: 70-80% of retail forex traders lose money. This guide explains how forex really works.
What is forex trading?
Forex (foreign exchange) trading involves buying one currency while simultaneously selling another. Currencies trade in pairs — EUR/USD, GBP/JPY, USD/CHF — and the exchange rate tells you how much of one currency you need to buy the other.
EUR/USD at 1.0850 means 1 Euro buys 1.0850 US Dollars. If you believe the Euro will strengthen against the Dollar, you 'buy' EUR/USD. If the rate rises to 1.0950, you profit. If it falls to 1.0750, you lose.
Currency pair categories
Major pairs involve the US Dollar and are the most liquid: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD. Minor pairs (cross pairs) don't include USD: EUR/GBP, EUR/JPY, GBP/JPY. Exotic pairs involve one major currency and one from a smaller economy: EUR/TRY, USD/ZAR. Majors have the tightest spreads and deepest liquidity — beginners should stick to EUR/USD and GBP/USD.
How pips and lots work
A pip (percentage in point) is the smallest standard price movement in forex. For most pairs, 1 pip = 0.0001 (the fourth decimal place). If EUR/USD moves from 1.0850 to 1.0860, it moved 10 pips.
A standard lot = 100,000 units of base currency. A mini lot = 10,000 units. A micro lot = 1,000 units. Most retail traders use micro or mini lots. With 10:1 leverage and a micro lot (€1,000 notional), a 10-pip move = €1 profit or loss. With a standard lot, that same 10-pip move = €100.
Leverage in forex
Forex is almost always traded with leverage. EU ESMA rules cap retail leverage at 30:1 for major pairs. This means a €100 deposit controls a €3,000 position. Leverage amplifies gains and losses equally.
With 30:1 leverage, a 3.3% adverse move wipes out your entire margin. Use a stop-loss on every trade — it's not optional. Professional traders risk no more than 1–2% of their total capital on any single trade.
Key forex trading concepts
Technical analysis: Using charts, patterns, and indicators (RSI, MACD, moving averages) to forecast price movements based on historical data. Fundamental analysis: Trading based on economic data — interest rate decisions, inflation, GDP, employment figures. Sentiment analysis: Understanding market positioning and flows. Risk management: Setting stop-losses, calculating position size, never risking more than 1-2% per trade.
Most successful traders combine all three approaches rather than relying on any single method.
Choosing a regulated forex broker
For EU traders, look for: ESMA/MiFID II regulation (ensures leverage caps, negative balance protection), tight spreads on major pairs (EUR/USD should be under 1 pip on good platforms), MT4/MT5 support (industry-standard platforms), fast order execution, and a genuine demo account.
Top EU-regulated forex brokers: OANDA (best overall), XTB (best for beginners), Pepperstone (best for low spreads and professional tools).