Forex trading is built on a simple concept: exchanging one currency for another to profit from price movements. But behind this simplicity lies a dynamic, liquid market where traders take positions based on real-time economics, global news, and technical signals.
At JMarkets, we make it easy for new traders to enter the forex market with clear tools, competitive conditions, and educational support. This guide explains how forex trading works, what currency pairs are, how pricing functions, and why margin and leverage matter.
How Forex Trading Works
Forex trading involves buying one currency while simultaneously selling another. You profit when the price movement favors your position, whether the market rises or falls.
Example 1: Profiting from a Rising Base Currency
- You have $1600.
- The current exchange rate for GBP/USD is 1.6000.
- You buy 1000 GBP for $1600.
- The rate rises to 1.6100.
- You sell 1000 GBP and receive $1610.
- Profit: $10.
Example 2: Profiting from a Falling Base Currency
- You have 1000 GBP.
- The exchange rate for GBP/USD is 1.6000.
- You sell GBP and receive $1600.
- The rate falls to 1.5900.
- You buy GBP again at the new rate and receive 1006.28 GBP.
- Profit: 6.28 GBP.
You can profit from both upward and downward price moves. The key is correctly forecasting the direction of a currency pair.
Currency Pairs, Cross Rates, and How Forex Prices Work
All forex trading involves currency pairs, where one currency is exchanged for another. A currency pair shows the value of one currency relative to another. For example, EUR/USD reflects how many US dollars one euro can buy.
There are over 100 currency pairs available, but the majority of global trading volume is concentrated in a few major pairs. These include:
- EUR/USD
- GBP/USD
- USD/JPY
- USD/CHF
- AUD/USD
- USD/CAD
These are known as the majors, and they account for around 66% of total forex volume. Each of them includes the US dollar (USD), the world’s reserve currency and the most traded currency globally.
Currency pairs that do not include the USD are called cross-currency pairs, or crosses, for example, EUR/JPY or GBP/AUD. Even though USD isn’t part of the pair, its value is still used indirectly in calculating the cross rate.
Understanding Currency Pair Structure
Each currency pair has two components:
- Base currency: The first currency in the pair (e.g., EUR in EUR/USD)
- Quote currency: The second currency (e.g., USD in EUR/USD)
A price like EUR/USD = 1.4000 means 1 euro equals 1.40 US dollars.
When trading, you buy or sell the base currency in exchange for the quote currency. For example, if you go long on EUR/USD, you’re buying euros and selling dollars.
Modern forex pricing usually uses five decimal places. The smallest price change is called a point, and one pip equals 10 points. For example:
- EUR/USD rises from 1.40000 to 1.40001 → up 1 point
- EUR/USD rises from 1.40000 to 1.40010 → up 1 pip
For JPY pairs like USD/JPY, prices are shown with three decimals (e.g., 145.360), and 1 pip still equals 10 points.
Bid, Ask, and Spread in Forex
Whenever you view a currency pair on a trading platform, you’ll see two prices:
- Bid: The price at which the broker buys from you (your selling price)
- Ask: The price at which the broker sells to you (your buy price)
The Ask is always higher than the Bid, and the difference between them is called the spread. For example:
| Currency Pair | Bid | Ask | Spread |
| EUR/USD | 1.3063 | 1.3065 | 2 pts |
Buy orders open at the Ask and close at the Bid
Sell orders open at the Bid and close at the Ask
Spreads are measured in points and vary depending on the currency pair, market volatility, and account type. JMarkets offers tight spreads across all major pairs, critical for cost-efficient trading, especially in short-term strategies like day trading or scalping.
Leverage and Margin in Forex Trading
Forex trading involves significant capital flows, a single standard lot equals 100,000 units of the base currency. But most individual traders don’t need that much capital upfront, thanks to two key mechanisms: leverage and margin.
What Is Leverage?
Leverage allows you to control a larger position than your actual account balance would permit. It’s expressed as a ratio, for example, 1:100 or 1:1000. This means that with $100 and 1:100 leverage, you can open a position worth $10,000.
At JMarkets, we offer flexible leverage levels from 1:1 up to 1:3000, depending on your account type and risk preference.
Leverage amplifies both potential profits and potential losses, so it must be used with strict risk control.
What Is Margin?
Margin is the amount of money you must have in your account to open a leveraged trade. It acts as a security deposit. For instance:
- You want to trade 1 standard lot of EUR/USD (100,000 EUR)
- Your leverage is 1:100
- Required margin = 100,000 ÷ 100 = 1,000 EUR
If your margin level drops too low due to losses, your position may be closed automatically by a margin call. That’s why it’s essential to monitor your margin usage and account equity closely.
At JMarkets, our platform calculates margin in real-time, helping you manage your exposure and avoid overleveraging.