Forex (foreign exchange) is the largest financial market in the world, with over $7.5 trillion traded daily. It is where currencies are bought and sold. This lesson covers everything you need to know to understand forex trading as a UK beginner.
Currency Pairs
Forex is always traded in pairs. The first currency is the base, the second is the quote. GBP/USD = 1.2700 means one pound buys 1.27 dollars.
| Type | Pairs | Characteristics |
|---|---|---|
| Majors | EUR/USD, GBP/USD, USD/JPY, USD/CHF | Most liquid, tightest spreads |
| Minors (Crosses) | EUR/GBP, GBP/JPY, AUD/NZD | No USD, wider spreads |
| Exotics | USD/TRY, EUR/ZAR, GBP/MXN | High spreads, volatile, risky |
Pips and Lots
A pip (percentage in point) is the smallest standard price move: 0.0001 for most pairs, 0.01 for JPY pairs. If GBP/USD moves from 1.2700 to 1.2710, that is a 10-pip move.
Lots determine your trade size and how much each pip is worth:
- Standard lot (100,000 units) — 1 pip = roughly £7.70
- Mini lot (10,000 units) — 1 pip = roughly £0.77
- Micro lot (1,000 units) — 1 pip = roughly £0.08
Leverage
Warning
FCA rules limit retail forex leverage to 30:1for major pairs and 20:1 for minors. This means you need £3,333 margin to control a £100,000 position. Leverage amplifies both profits AND losses. At 30:1, a 3.3% move against you wipes out your entire margin. Respect leverage or it will destroy you.
Trading Sessions
Forex trades 24/5, but activity varies by session:
- Asian session (midnight-9am UK) — quieter, range-bound
- London session (8am-5pm UK) — highest volume, best for GBP pairs
- New York session (1pm-10pm UK) — high volume, USD-driven
- London/NY overlap (1pm-5pm UK) — the most active period, biggest moves
Fundamental Drivers
Currency values are driven by:
- Interest rates — higher rates attract foreign capital, strengthening the currency
- Inflation (CPI) — high inflation weakens a currency
- Employment data — strong jobs = strong economy = strong currency
- GDP — economic growth supports the currency
Key Concept
Carry trade: borrowing in a low-interest-rate currency and investing in a high-interest-rate currency to earn the difference. For example, borrowing Japanese yen (near-zero rates) and buying Australian dollars (higher rates). You earn interest daily. The risk: if the high-yield currency weakens, your losses can exceed the interest earned.
Risk Disclaimer: Trading financial markets involves significant risk of loss. The content on this page is for educational purposes only and does not constitute financial advice. Past performance is not indicative of future results. You should not trade with money you cannot afford to lose. 70-80% of retail investor accounts lose money when trading CFDs and spread bets. Consider whether you understand how these products work and whether you can afford the high risk of losing your money.