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Lesson 1 Introduction to the Forex Market

Explain forex, identify a currency pair, distinguish buying from selling, and describe pips, lot size, spread, and leverage in plain language.

What is forex trading

Forex means foreign exchange. It is the activity of exchanging one currency for another. A traveller buying euros, a company paying an overseas supplier, and a trader speculating on an exchange rate all participate in currency exchange for different reasons. An exchange rate tells you how much of one currency is needed to buy another. Currency prices change as buyers and sellers respond to information, financing needs, and changing expectations. A speculative trader tries to benefit from those changes and accepts the possibility of a loss. Much currency trading takes place over the counter, meaning through a network of institutions and dealers rather than one central exchange. Retail products may be leveraged off exchange contracts or CFDs, depending on the jurisdiction. Trading such a contract is different from receiving foreign currency in a bank account. Identify the actual product before using a platform. Investor.gov explanation of forex market structures (https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/foreign).

How currency pairs work

Forex prices are expressed in pairs. The first currency is the base currency; the second is the quote currency.

Buying a pair creates exposure to a stronger base currency relative to the quote currency. Selling creates the opposite exposure. This convention is explained in CME Group’s guide to FX quotes (https://www.cmegroup.com/education/courses/introduction-to-fx/understanding-fx-quote-conventions). Buy or go long: You expect the pair’s price to rise. If you buy EUR/USD, you expect the euro to strengthen relative to the dollar. Sell or go short: You expect the pair’s price to fall. If you expect the dollar to strengthen against the euro, the corresponding direction is to sell EUR/USD. “The dollar will rise” is incomplete without naming the other currency. The dollar can strengthen against one currency while weakening against another.

A worked example

Suppose a simulated trader buys 1,000 EUR at an EUR/USD execution price of 1.1000 and later sells those euros at 1.1050. The price difference is 0.0050 USD per euro. Multiplying by 1,000 EUR gives a 5 USD trading gain before any separate fees or financing. If the exit execution price is 1.0950 instead, the calculation gives a 5 USD trading loss. A direction can be wrong, and a correct direction may still fail to produce a net profit after costs.

Pips and lot size

A pip is a conventional unit for measuring an exchange rate movement. For many familiar pairs, including EUR/USD, one pip is 0.0001. For pairs with JPY as the quote currency, it is commonly 0.01. Check the instrument specification. EUR/USD moving from 1.1000 to 1.1010 rises by 10 pips. A pip is a price distance, not a fixed cash amount. The cash value depends on the position size and currencies involved. Lot size describes trade volume. Common OTC forex conventions are:

For EUR/USD in a USD account, 1,000 units have a pip value of 0.10 USD. A 10 pip movement therefore changes the position’s trading value by 1 USD before separate charges. Larger volume increases both potential gains and potential losses. These are common retail conventions; platforms may instead accept units. OANDA explanation of pips and position size (https://www.oanda.com/us-en/skills-and-insights/education/introduction-trading/basics/what-is-a-pip/).

Spread and leverage

The bid is the price at which you can sell; the ask is the price at which you can buy. The spread is ask minus bid. At a bid of 1.1000 and an ask of 1.1002, the spread is 2 pips. Other trading costs may also apply. Leverage allows a position’s value to exceed the capital supporting it. The required margin is collateral for the position; it does not define its maximum loss. A small exchange rate movement can cause a large percentage change in a leveraged account. Lesson 6 shows the arithmetic.

When the market operates

The global forex market operates through most of the business week as activity moves between financial centres. It is often described as 24 hours a day, five days a week. Retail opening times, daily pauses, holidays, and daylight saving changes depend on the provider. Continuous access does not mean equal liquidity or equal trading conditions at every hour.

Can you make money from forex

Profits are possible, and losses are common. Education, analysis, discipline, and testing can improve a decision process without ensuring a profitable result. Costs, uncertainty, and execution matter even when a trader has practised carefully. Forex should never be presented as dependable income or a quick route to wealth. The CFTC describes substantial risks and common forex fraud tactics (https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/reduce_risk_of_forex_fraud.htm).

Practical assignment

Answer these six questions in your own words:

  1. What does forex mean?
  2. What is a currency pair?
  3. What is the difference between BUY and SELL?
  4. What is a pip?
  5. What does lot size determine?
  6. What is leverage, and why can it be risky?

Then explain why buying EUR/USD would contradict a prediction that USD will strengthen against EUR. Calculate the pip movement from 1.1000 to 1.1030. Takeaway: Begin with the pair, the direction, and the exposure. At FAV ACADEMY, the first step is understanding the decision you are making.

Check your understanding

After the four lessons in this module, complete Module 1 knowledge check from the course overview. It contains the three questions from each lesson with feedback after submission. Keep written calculations in your workbook.

Glossary

Ask
Price at which the customer can buy the pair
Base currency
First currency in a quoted pair
Bid
Price at which the customer can sell the pair
Financing
Charge or credit for holding a position under the contract’s terms
Leverage
Exposure relative to the capital supporting it
Liquidity
Ability to trade at available prices and size
Long
Exposure that benefits from a higher pair price before costs
Lot
A position volume convention; verify base units for the instrument
Margin
Collateral required to support a position
OTC
Over the counter, outside a central exchange
Pip
A conventional exchange rate movement unit
Quote currency
Second currency, in which one base unit is priced
Short
Exposure that benefits from a lower pair price before costs
Spread
Ask minus bid

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