Forex trading refers to the exchange of currencies in the global foreign exchange market. It’s also known as margin FX trading or currency trading, and involves simultaneously buying one currency while selling another. 

While a necessary part of international trade and travel, the majority of forex trading by individuals is for the purpose of speculating on the price movement in exchange rates – eg buying GBPUSD when it’s low and selling when it’s high. 

Forex trading is particularly popular because currency markets are highly liquid and trade 24 hours a day five days a week. They can also be sensitive to a range of economic and political factors, creating the potential for significant volatility and opportunities

Forex markets are always quoted in pairs of currencies known as forex pairs, FX pairs, or just currency pairs.  

The first currency in the pair is known as the base currency. The second is the quote currency. The value of the forex pair refers to the amount of the quote currency required to buy one unit of the base currency. 

For example, EURUSD is the forex pair that describes the value of the Euro vs the US dollar. If the EURUSD price is 1.2, it means that €1 is worth $1.20. If something then happens to cause the Euro to strengthen vs the dollar, then EURUSD will increase, eg to 1.4. 

Major forex pairs involve the US dollar being paired with another major global currency like GBP, EUR or JPY. They are the most liquid and widely traded forex pairs.  

Minor forex pairs refer to pairs of major currencies that don’t include the USD. While exotic forex pairs include a major currency paired with a currency from a smaller or emerging economy. 

A lot is the standard unit of measurement used in forex to refer to how much of the base currency is being traded. 

- A standard lot = 100,000 units of the base currency

- A mini lot = 10,000 units of the base currency

- A micro lot = 1000 units of the base currency

- A nano lot = 100 units of the base currency 

Thinking of an example, if GBPUSD is trading at 1.30 (ie 1 GBP costs 1.30 USD), then one standard lot of GBPUSD is worth £100,000 or 100,000 x 1.30 = $130,000.  

However, when trading with leverage, you wouldn’t need to have £100,000/$130,000 in cash to trade one standard lot of GBPUSD. You would typically need to put up margin equating to 3.33% of the position value, or just £3330/$4329. 

Your profit or loss would still be based on the full position size such that if GBPUSD increases by 1%, you would make a profit (excluding fees) of 1% x $130,000 = $1300, a 30% return on your margin.