Forex

Currency Trading: How the Forex Market Works

Astron Team · 09/24/2026 · 6 min read

The foreign exchange market, also called forex, is the largest financial market in the world by daily trading volume, moving trillions of dollars between banks, companies, governments, and individual traders. Despite the scale, the basic concepts for starting to understand currency trading are relatively simple, as long as you understand the logic of currency pairs.

This article explains how currency trading works, what pips are, how to calculate results, and the specific risks of this market.

How currency pairs work

In the forex market, currencies are always traded in pairs, because the value of one currency only makes sense compared with another. In the dollar/real pair (USD/BRL), for example, the quote shows how many reais are needed to buy one dollar. If the quote is 5.20, it means one dollar is worth R$ 5.20 at that moment.

When you buy a currency pair, you're, in practice, buying the first currency in the pair (called the base currency) and selling the second (called the quote currency). If you believe the dollar will appreciate against the real, you buy the USD/BRL pair; if you believe the opposite, you sell the same pair.

What a pip is and how to calculate the result

A pip is the smallest standardized price move in a currency pair, usually representing the fourth decimal place of the quote (or the second, in pairs involving the Japanese yen). In the USD/BRL pair, a move from 5.2000 to 5.2010 represents 10 pips of movement.

To calculate a trade's financial result, you multiply the number of pips by the movement and by the position size. An example: with a position equivalent to $10,000 in the USD/BRL pair, each pip of movement (0.0001 in the quote) is worth approximately R$ 1. If the price moves 50 pips in favor of the position, the result would be approximately R$ 50, before deducting trading costs.

The main factors that move the currency market

Central bank interest rate decisions

Changes in a country's interest rate tend to be one of the strongest factors in currency movement, since higher rates tend to attract foreign capital seeking better returns, appreciating the local currency.

Economic data

Indicators such as inflation, employment, and economic growth influence expectations about future interest rate decisions, and therefore also move the exchange rate, even before any actual decision is made.

Political and geopolitical events

Elections, government changes, and international tensions can cause sharp, fast moves in the exchange rate, often disconnected from any economic data released at that moment.

• Currencies are always traded in pairs, never in isolation.
• The pip is the standard unit for measuring the price move in the pair.
• Interest rate decisions tend to be the factor with the biggest impact on the exchange rate.
• The forex market operates on a global scale, nearly 24 hours a day on business days.

Specific risks of currency trading

A frequently underestimated risk is trading less liquid currency pairs, where the spread (the difference between the buy and sell price) is bigger, making the trade more expensive. Another point of attention is the leverage common in this market: since daily exchange rate moves tend to be small in percentage terms, many platforms offer high leverage, which proportionally amplifies both gains and losses.

The time of highest liquidity

The forex market has variable liquidity throughout the day, with peaks when the sessions of different financial centers overlap. Trading during low-liquidity hours tends to result in bigger spreads and less predictable execution.

How to start trading currencies responsibly

Choose liquid currency pairs to start, understand how to calculate the pip value before setting your position size, and always set a stop loss considering the chosen pair's historical volatility. Keep an eye on the economic calendar, especially interest rate decisions and the release of relevant data, since these events tend to concentrate most of the market's volatility. As with any financial market, currency trading involves real risk of loss, and the leverage common in this market requires even stricter risk management.

Keep a log of the trades made in each currency pair, noting the time, the day's economic context, and the result obtained. Over time, this habit helps identify in which pairs and at what times your strategy works best, instead of relying only on the general impression that the currency market is more predictable than other markets.