What is forex

This lesson explains what forex is, how currency pairs are quoted, what pip value and lot size mean, and how session overlap affects liquidity. It is designed for someone who has seen forex advertised as a 24/5 market and wants to understand the mechanics before opening a live account.

Forex is a pair market

Forex, or foreign exchange, is a decentralised market where currencies are traded in pairs. There is no central exchange. Trades are executed through banks, brokers, and electronic communication networks. When you trade forex through a broker, you are usually trading a CFD or a derivative, not physical currency delivery.

A currency pair consists of a base currency and a quote currency. The price shows how much of the quote currency is needed to buy one unit of the base currency. In the pair EUR/USD, EUR is the base currency and USD is the quote currency. If the price is 1.0800, it takes 1.08 US dollars to buy one euro.

Major, minor, and exotic pairs

Currency pairs are grouped by liquidity:

• Major pairs include the US dollar and one of the other major currencies: EUR, GBP, JPY, CHF, CAD, AUD, NZD. They are the most liquid and usually have the tightest spreads.
• Minor pairs, also called crosses, do not include the US dollar. Examples are EUR/GBP and GBP/JPY. They are less liquid than majors but still liquid enough for most retail traders.
• Exotic pairs include a major currency and a currency from a smaller or emerging economy, such as USD/PLN or EUR/HUF. They are less liquid and often have wider spreads.

Liquidity affects spread, slippage, and execution quality. For beginners, major pairs are usually the best starting point because they offer the lowest cost and the most data.

Pip value and lot size

A pip is the smallest standard price movement in a currency pair. For most pairs, one pip is 0.0001. For pairs involving JPY, one pip is 0.01. Pip value is the monetary value of one pip for one standard lot.

A standard lot is 100,000 units of the base currency. A mini lot is 10,000 units. A micro lot is 1,000 units. Pip value depends on lot size and the pair. On EUR/USD, one pip for a standard lot is approximately 10 USD. On USD/JPY, one pip for a standard lot is approximately 9 USD.

Position size in forex is calculated from the risk budget and stop distance in pips. If you risk 1 per cent of a 10,000-unit account and your stop is 20 pips away, the position size in micro lots depends on the pip value per micro lot. The position size calculator in this course automates that calculation.

Measure the spread, do not just believe that forex is cheap

The spread on FX is not constant — the same broker shows different numbers at 10:00 and at 2:00. The measurement protocol takes a week:

1. Pick 3 windows: 9:00-12:00, 15:00-18:00, 23:00-1:00 PL.
2. Record the spread 5 times per window, about 20 minutes apart.
3. Average each window separately, not the whole day.
4. Record the maximum spread you saw.

The average-to-maximum gap is often larger than the gap between brokers.

Cost as a percentage of R — the only number that matters

The spread in pips means nothing until you relate it to your risk per trade.

round_turn_cost (pts) = spread + commission_in_points
R (pts)               = distance from entry to stop
cost_share            = round_turn_cost / R

With R = 30 pips and a round-turn cost of 1.2 pips the cost share is 4%. With R = 8 pips the same cost is 15% of R.

Some styles are unprofitable at a given cost — learn that from a spreadsheet, not your account history.

Swap and rollover: the cost of holding a position

Holding a position overnight costs or earns a swap (swap point): the interest rate difference between the two currencies plus the broker markup.

swap_cost = swap_in_points x number_of_nights x point_value

• Wednesday is often more expensive. Many brokers charge a triple swap then, because spot FX settles with a two-day delay and the Wednesday rollover covers the weekend.
• Swap works both ways. On some pairs a short position earns and a long position pays. The paying direction is not a reason to enter.

Session overlap and liquidity

Forex is open 24 hours a day, five days a week, but liquidity varies by session. The main sessions are Tokyo, London, and New York. The overlap between London and New York, from about 8:00 to 12:00 Eastern Time, is the most liquid period. The Asian session is quieter, especially for pairs that do not involve JPY.

Liquidity affects spread and slippage. During session overlap, spreads are usually tightest and execution is fastest. During low-liquidity periods, spreads widen and slippage increases. If you trade during the Asian session, choose a pair that includes JPY or AUD to benefit from local liquidity.

The full session breakdown is in the lesson Sessions and liquidity.

Spot forex versus CFD forex

Spot forex is the underlying market where currencies are delivered, usually within two business days. Retail traders rarely access the spot market directly; they trade through brokers who offer CFDs or derivatives on forex.

A forex CFD mirrors the price of the underlying pair but involves a contract with the broker. You do not own the currency; you have a price exposure settled in your account currency. The broker earns from the spread and, in some cases, from overnight financing.

The key practical differences are:

• Counterparty: with a CFD, the broker is the counterparty; with spot, the market is.
• Delivery: CFDs do not involve physical delivery; spot forex does.
• Leverage: CFD brokers offer leverage; spot forex through banks usually does not.
• Cost: CFDs include spread and swap; spot forex includes spread and sometimes commission.

For most retail traders, the choice is between a regulated CFD broker and a bank account. The CFD broker offers convenience, leverage, and small position sizes. The bank account offers direct market access without counterparty risk to the broker, but usually without leverage and with higher minimum position sizes.

Do not confuse the EUR/USD chart with owning euros. It is exposure to a price difference under a contract with the broker. The same chart as a futures contract on FX looks similar — underneath it is a different contract.

Starting protocol (FX track)

Four steps before you learn a pair from Twitter:

1. Write down the base/quote and product type at your broker.
2. Measure the spread in three session windows using the protocol above.
3. Record the long/short swap.
4. Calculate the cost share in R.

The columns for this are on the Method page.

Leverage limits for retail forex

In the EU, retail CFD leverage on major forex pairs is capped at 30:1. For minors and gold, the cap is 20:1. These limits apply to CFD brokers, not to bank spot forex accounts. Check your broker’s terms to confirm whether the limit applies to your account type.

High leverage does not create edge. It amplifies exposure. If you risk 1 per cent per trade and your stop is 20 pips away, leverage does not change the economic risk. It only changes the notional exposure. A 100:1 leverage slider does not make a 1R trade safer; it makes the position larger for the same margin.

FX is known for its high leverage, the main reason retail accounts die quickly. Leverage is a broker limit, not a target size. First comes the 1–2 per cent risk rule and a size from the stop-loss, then the free margin. Margin that tempts you to raise the lot is a warning sign.

The mechanics of retail leverage limits in the EU and the stop-out distance formula are in the lesson Leverage and margin.

Common mistakes

• Trading exotic pairs because the spread looks wide, thinking the move will be larger. Wider spread usually means lower liquidity and higher execution cost.
• Using maximum leverage because it is available. Leverage scales notional exposure, not edge.
• Ignoring session overlap and trading during low-liquidity hours without adjusting stop distance.
• Confusing CFD forex with spot forex. The tax and counterparty treatment can differ.
• Starting with a micro lot but calculating position size as if it were a standard lot.

Next step

If you want to trade forex, read the lesson on pips, pips, and lots to understand position sizing. If you want to trade CFDs, read the lesson on leverage and margin to understand stop-out distance.

Exercise

Choose one major pair and one exotic pair. Record the current spread in pips, the average daily range in pips, and the typical session overlap liquidity. Calculate the spread as a percentage of the average daily range for each pair. Compare the result and write down which pair is more suitable for a beginner with a small account and tight stop distance.

Run the spread measurement in three windows at your broker and record the long/short swap with the Wednesday rate. One table of facts, not a feeling that the spread is fine.

Common questions

Is forex at a broker in Poland the interbank market?

Usually not. A retail trader gets a CFD/OTC product — a contract for the price difference, with the broker as counterparty.

Why is leverage on FX so dangerous?

A small move in pips times a large lot equals a large loss relative to capital. The broker leverage limit does not replace the 1 percent rule and a stop, and the broker may close the position at 50 percent of the required deposit.

Why is swap sometimes triple on Wednesday?

Because spot FX settles with a two-day delay and the Wednesday rollover covers the weekend, three days of swap are charged at once. Check your broker swap table.

Can I trade forex 24 hours a day?

Technically almost (Mon-Fri), but liquidity and spread depend on the session. Choose 1-2 windows in Polish time instead of trading around the clock.