How Does Forex Trading Work? Buying, Selling and Profit Explained
By BrokaBoy Research Team · Reviewed 13 October 2026 · Updated 13 October 2026 · 8 min read
Forex trading means exchanging one currency for another and profiting if the exchange rate moves in your favour. Currencies trade in pairs such as EUR/USD: you buy the pair if you expect the first currency to strengthen against the second, and sell if you expect it to weaken. Retail traders usually do this through a broker using leveraged CFDs or spot contracts, so profits and losses are calculated from pips moved × position size, minus costs.
Key takeaways
Every forex trade is a bet that one currency will rise or fall against another; you can profit from either direction.
Profit or loss = price change × position size; for EUR/USD, 1 standard lot (100,000 units) moves $10 per pip.
Leverage cuts the deposit (margin) needed but does not change profit or loss per pip.
Your costs are the spread, any commission and overnight swap; they apply whether you win or lose.
Most retail CFD accounts lose money, so size every trade from a fixed risk per trade.
Forex in one paragraph
Currencies are priced against each other. When you see EUR/USD 1.0852, it means one euro costs 1.0852 US dollars. If you think the euro will gain against the dollar, you buy EUR/USD. If you think it will lose ground, you sell it. When you close the trade, the difference between your opening and closing price, multiplied by the size of your position, is your profit or loss. That is the entire mechanism; everything else (lots, pips, leverage, spreads) is detail about how big the bet is and what it costs.
The market is enormous. The Bank for International Settlements' 2025 survey put average turnover at about $9.6 trillion a day, with the US dollar on one side of roughly 89% of trades. Most of that is banks, funds and corporations. Retail traders are a small slice, trading through brokers.
Who you are actually trading with
When you click "buy" on a broker's platform you are almost never buying euros at a bank. You open a contract with your broker, usually a CFD (contract for difference) or a rolling spot contract, whose value follows the real exchange rate. Depending on its model, the broker either passes your order to liquidity providers (banks and other market makers) or takes the other side itself and manages the net risk. Our guide on how forex brokers make money explains the difference.
Practical consequences:
You can sell first (go short) without owning the currency.
You never take delivery; positions settle in cash in your account currency.
Positions held past the daily rollover pay or receive a swap based on the interest-rate gap between the two currencies.
Your safety depends on the broker's regulation, not on the forex market itself.
Reading the pair: base, quote, bid and ask
In EUR/USD, EUR is the base currency and USD is the quote currency. The price tells you how many units of the quote currency buy one unit of the base.
Brokers show two prices:
Price
Meaning
You use it to
Bid 1.08510
What the broker pays for the base currency
Sell (open short or close a long)
Ask 1.08520
What the broker charges for the base currency
Buy (open long or close a short)
The gap, here 0.00010 or 1 pip, is the spread: your entry cost. You buy at the higher price and sell at the lower one, so every trade starts slightly negative. Full details are in how to read forex quotes and our spread glossary entry.
Pips and lots: the units of a trade
A pip is the standard unit of price movement: 0.0001 for most pairs, 0.01 for JPY pairs. Many brokers quote a fifth decimal (a "pipette", one-tenth of a pip).
A lot is the trade size. 1 standard lot = 100,000 units of the base currency. 0.10 lot (a mini lot) = 10,000 units; 0.01 lot (a micro lot) = 1,000 units.
For any pair quoted in USD (EUR/USD, GBP/USD, AUD/USD), the pip value in a USD account is simple:
Here is a complete trade with every number calculated. Prices are illustrative.
The idea. You expect the euro to rise after weaker-than-expected US data.
1. Choose size from risk. Account: $1,000. You are willing to lose $20 (2%) if wrong. Your stop will be 20 pips below entry. Pip value needed: $20 ÷ 20 pips = $1 per pip, which is 0.10 lot.
2. Open. You buy 0.10 lot at the ask, 1.08520. Position: 10,000 euros' worth, about $10,852 of exposure.
3. Margin. The broker locks part of your balance as collateral. At 1:30 leverage: 10,852 ÷ 30 = $361.73. At 1:500: 10,852 ÷ 500 = $21.70. The rest stays free.
4. Set orders. Stop-loss at 1.08320 (20 pips below entry). Take-profit at 1.08910 (39 pips above).
5a. Outcome if right. Price rises; your take-profit fills at the bid, 1.08910.
Gain: 1.08910 − 1.08520 = 0.00390 = 39 pips × $1 = +$39. The spread is already inside this number because you bought at the ask and sold at the bid.
5b. Outcome if wrong. The bid falls to 1.08320 and your stop fills.
Loss: 1.08320 − 1.08520 = −0.00200 = −20 pips × $1 = −$20, exactly the amount you planned.
6. Overnight. If you held the position past the broker's daily rollover, a swap charge or credit would be added. It is quoted per lot per night in your platform's symbol specification.
Notice that leverage appeared only in step 3. Whether you used 1:30 or 1:500, the result was +$39 or −$20. Leverage changes how much margin is tied up, and therefore how big a position you could open, not what each pip is worth.
You enter all prices and exchange rates yourself; nothing is fetched live. Results are estimates and exclude broker-specific charges.
Selling: making money when a currency falls
Short trades work the same way in reverse. Suppose you sell 0.20 lot USD/JPY at 150.20 expecting the yen to strengthen, and buy back at 149.65.
Move in your favour: 150.20 − 149.65 = 0.55 = 55 pips (a JPY pip is 0.01).
Profit in yen: 0.55 × 20,000 units = ¥11,000.
Converted to dollars at the closing rate: 11,000 ÷ 149.65 = $73.50.
Profit on USD/JPY lands in yen first because yen is the quote currency, then the platform converts it to your account currency.
What if your account is not in dollars?
Your broker converts profits into your account currency automatically. Using the +$39 EUR/USD trade above:
ZAR account, USD/ZAR at 17.50: 39 × 17.50 = R682.50
EUR account, EUR/USD at 1.0891: 39 ÷ 1.0891 = €35.81
Rates are illustrative. The conversion means your result also depends slightly on the exchange rate between the dollar and your own currency at the moment of closing.
Leverage: the multiplier that cuts both ways
Leverage lets a small deposit control a large position. The danger is not the leverage ratio itself but the position size it permits.
Same $1,000 account
0.10 lot
1.00 lot
Value of 1 pip
$1
$10
39-pip win
+$39 (+3.9%)
+$390 (+39%)
20-pip loss
−$20 (−2%)
−$200 (−20%)
Margin at 1:500
$21.70
$217.04
High leverage makes the 1.00 lot trade possible on $1,000. It does not make it sensible. A few losing trades at that size can empty the account. Retail leverage is capped at 1:30 on major pairs in the EU and UK for this reason; offshore entities often allow far more. See forex margin explained and best leverage for beginners.
What a trade really costs
Cost
When you pay it
Example
Spread
On every trade, at entry
1 pip on 0.10 lot EUR/USD = $1
Commission
On raw-spread/ECN accounts, per lot, round turn
e.g. $6–7 per standard lot at many ECN brokers; check yours
Swap
Each night a position stays open
Charged or credited per lot; triple on one weekday
Conversion
When profit is in a currency different from your account
Built into the rate the broker uses
A scalper making 30 trades a day pays the spread 30 times. Costs are one of the main reasons most retail accounts lose money; read why forex traders lose money.
What moves exchange rates
Prices move because the balance of buying and selling changes. The main drivers:
Interest rates and central-bank guidance. Higher expected rates usually attract capital to a currency.
Risk sentiment. In stress, money tends to move toward the US dollar, yen and Swiss franc.
Flows and positioning: corporate hedging, month-end rebalancing, large funds adjusting exposure.
Traders analyse these with fundamental analysis, price charts (technical analysis) or both.
The trading day: sessions and why timing matters
Forex has no central exchange, so it trades around the clock from Sunday evening to Friday evening GMT as financial centres open and close. Liquidity is not constant through the day:
Session (approx. GMT)
Character
Pairs that tend to move
Sydney/Tokyo, 22:00–08:00
Quieter, narrower ranges
AUD, NZD, JPY pairs
London, 07:00–16:00
Highest share of global volume
EUR, GBP, CHF pairs
New York, 12:00–21:00
Big US data releases at 12:30–14:00
USD pairs, CAD
London–New York overlap, 12:00–16:00
Usually the most active window
Majors
Times shift by an hour when daylight saving starts or ends. Spreads typically widen in the quiet hour around the daily rollover and at the Sunday open, which is why many traders avoid opening positions then. Our market sessions tool shows the live session in your time zone.
Ways retail traders access forex
Product
How it works
Typical user
Spot forex / CFD with a broker
Leveraged contract on the exchange rate, cash-settled
Most retail traders worldwide
Spread betting (UK, Ireland)
Stake per point instead of lots; tax treatment differs
UK residents
Currency futures and options
Exchange-traded, standardised contracts and expiry dates
Larger or more advanced traders
Currency ETFs
Fund tracking a currency, bought like a share
Investors wanting unleveraged exposure
This guide describes the first type, because it is what most "forex brokers" offer. The mechanics of price, size and pips carry over to the others with different contract units.
How to start without making the classic mistakes
Learn the units first: pips, lots, margin. If you cannot calculate a trade's risk before opening it, you are not ready.
Open a demo account and place at least 30–50 trades with a written plan.
Choose a regulated broker and check which entity you are signing up with; leverage and protections differ by entity.
Start small: 0.01 lot trades risk cents per pip, which is the point.
Fix your risk per trade (many traders use 0.5%–2%) and size each position from your stop distance.
Keep a journal, so you know whether your method actually works.
Broker features such as minimum deposits and leverage vary by region and entity. XM, for instance, states a $5 minimum deposit on its Standard and Ultra Low accounts at the time of writing; check each broker's site for your country before opening an account.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Most retail investor accounts lose money when trading CFDs. Consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Full risk disclosure.
Frequently asked questions
How do forex traders actually make money?
They profit when the price of a currency pair moves in the direction of their position by more than their costs. A buyer of EUR/USD gains if the euro rises against the dollar; a seller gains if it falls. Profit equals pips gained multiplied by pip value, minus spread, commission and swap. Consistent profit depends on a strategy with a positive edge and strict risk control, which most retail traders do not achieve.
Do you actually own currency when you trade forex with a broker?
Usually not. Most retail brokers offer contracts for difference (CFDs) or rolling spot contracts. You hold an agreement with the broker that pays out the price difference between opening and closing, rather than euros sitting in a bank. That is why you can sell a currency you do not own and why overnight positions incur swap charges or credits instead of real interest.
How much can you make from one forex trade?
It depends entirely on position size and how far price moves. A 0.10 lot EUR/USD trade earns or loses about $1 per pip, so a 39-pip move is roughly $39. A full standard lot would make that $390. The same maths applies to losses, which is why traders choose size based on how much they are willing to lose if the stop-loss is hit, not on how much they hope to make.
Can you lose more than you deposit in forex?
With leverage, losses can in theory exceed your deposit if the market gaps past your stop. Many regulators, including those under ESMA rules in the EU and the FCA in the UK, require negative balance protection for retail clients, which caps losses at the account balance. Offshore brokers may or may not offer it. Check the broker entity you sign up with before depositing.
What time is the forex market open?
The spot forex market runs 24 hours a day from Sunday evening to Friday evening (GMT), moving through the Sydney, Tokyo, London and New York sessions. Liquidity and volatility are highest when London and New York overlap. Your broker's platform may close briefly each day around 21:00–22:00 GMT for rollover, and prices often gap at the weekly open.
