What Is Forex Trading?

Forex meaning in plain words

Forex (short for "foreign exchange", also called FX) is the global market where currencies are exchanged for one another. Every time a currency is converted into another, for a trip, an import payment, a remittance or an investment, it is part of this market.

Currencies are always quoted in pairs, such as EUR/USD or USD/PKR. The first currency is the base, the second is the quote. The price tells you how much of the quote currency buys a single unit of the base currency. See how to read a currency pair for the details.

If you searched "forex trading kya hai": forex trading means buying one currency against another and hoping to close the position later at a better price. It is speculation on exchange-rate moves. It is not a savings product and it does not produce a steady income.

Who trades forex and why

Most forex volume does not come from individuals speculating. It comes from businesses and institutions that need currencies or manage currency risk:

• Central banks manage reserves and sometimes act in the market to influence their currency.
• Commercial banks trade with each other and quote prices to clients. This interbank layer is the core of the market.
• Companies convert sales revenue and pay foreign suppliers. Many hedge future payments against rate changes.
• Investment funds buy foreign assets and hedge or speculate on currencies.
• Retail traders are individuals who speculate through brokers, usually with small amounts and leverage.

More on each group: who trades forex and how the forex market works.

How a retail trader accesses the market

An individual cannot trade directly on the interbank market. Access goes through a broker, a company that provides prices, a trading platform and an account. See what a forex broker does and broker execution models.

In retail trading you usually do not receive actual currency. Most retail brokers offer CFDs (contracts for difference). A CFD is a contract that pays the price difference between opening and closing. See what is a CFD.

The basic workflow:

1. Open an account with a broker and choose a platform, such as MetaTrader 4 or MetaTrader 5.
2. Pick a pair and a position size in lots, the standard unit of trade size (what is a lot).
3. Buy (go long) if you expect the base currency to rise, or sell (go short) if you expect it to fall (long and short).
4. Set a stop loss and, if you want, a take profit.
5. Close the position. The difference between entry and exit, minus costs, is your result.

Retail forex is traded on margin with leverage. You put up a deposit (margin), and the broker lets you control a position much larger than that deposit. Leverage makes gains and losses larger relative to your money. See what is leverage and what is margin.

Profit and loss: pips and money

Price changes in forex are counted in pips. A pip is a standard small step in the price of a pair. Its exact decimal place depends on the pair, and many platforms also show a smaller step called a pipette (what is a pip, pips, points, pipettes).

Pips alone do not tell you how much money you made or lost. The money value depends on:

• the pair (the pip value is first calculated in the quote currency)
• the position size in lots
• your account currency (the value is then converted)

To see the value of a single pip, enter the pair, the lot size and your account currency in the calculator below. It returns the pip value in the quote currency and in your account currency.

Profit or loss in money is roughly the pip value multiplied by the number of pips the price moved in your favour or against you. Costs come off that result:

• Spread: the gap between the bid and ask prices (what is spread)
• Commission on some account types (commission per lot)
• Swap: a charge or credit for holding a position overnight (what is swap)

A full worked method is on forex profit and loss calculation and total cost of a trade.

Precise definitions for experienced readers

• Market structure: spot FX is an over-the-counter (OTC) market. There is no central exchange and no single official price. Liquidity is spread across dealers and venues (OTC vs exchange).
• Quote convention: a quote is base/quote. Buying executes at the ask, selling at the bid. A long position closes at the bid, a short position at the ask.
• Retail product: a retail "forex trade" is usually a rolling spot CFD with the broker as counterparty or intermediary. It is not delivery of currency.
• Rollover: open positions are rolled at the end of the trading day, and the interest differential is applied as swap. On the triple swap day, several days of swap are charged at once (rollover).
• Margin mechanics: equity is balance plus floating P/L. Margin level compares equity with used margin. When it falls far enough, a margin call and then a stop out can follow, and the stop out closes positions automatically (margin level, equity vs balance).
• Execution risk: in fast markets or at the weekly open, fills can differ from the requested price (slippage, price gaps).

Forex in Pakistan: the legal position

Before trading forex from Pakistan, read what the regulators have published:

• On residents buying offshore products: per the SBP, the purchase of offshore forex/margin/CFD products by Pakistani residents violates section 4(1) of FERA 1947.
• On payments: per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)).
• Securities supervision: the supervisor is the Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers.
• On offshore platforms: per the SECP, offshore forex/CFD platforms operate without regulatory approval in Pakistan. Also, per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse.

In practice, this means a Pakistani resident using an offshore forex or CFD platform faces legal risk and may have no local recourse if something goes wrong. For the full picture, see law and regulators and regulation and safety. If you only want official rupee exchange rates, see SBP exchange rates.

Risk: say it plainly

Leveraged forex and CFD trading can lose money fast. A move against you is multiplied by leverage, and you can lose your whole deposit in a short time. Many retail traders lose money (why retail traders lose money). If you want to learn how trades behave, practise on a demo account and study risk management before thinking about real money.

Frequently asked questions

What is forex in simple words?

Forex is the worldwide market for exchanging currencies. Forex trading is speculating on changes in exchange rates by buying one currency against another.

Forex trading kya hai?

It means buying or selling currency pairs, such as EUR/USD, to gain from price changes. Retail traders usually do this through a broker using leveraged CFDs. It carries a high risk of loss.

Is forex trading legal in Pakistan?

According to the State Bank, per the SBP, the purchase of offshore forex/margin/CFD products by Pakistani residents violates section 4(1) of FERA 1947. Read law and regulators before doing anything.

How do I know how much a pip is worth?

Use the pip calculator on this page. Enter the pair, the lot size and your account currency to get the pip value in the quote and account currency.

Do I own the currency when I trade forex online?

Usually not. Retail platforms mostly offer CFDs, which settle only the price difference between opening and closing.

Can I start without risking money?

A demo account uses virtual funds, so you can learn the platform and order types without a deposit. See first demo trade.