How Does Forex Trading Work? A Beginner's Explainer 

Forex trading means buying one currency and selling another. Its objective is to profit from exchange rate movements in the expected direction. 

Currency pairs, pips, position size, spreads, leverage, and margin affect the amount at risk and results. This article discusses each part using USD/ZAR examples for South African traders. 

Risk Warning: Forex trading carries substantial risk, especially with leverage. Losses can occur immediately; only risk money you can afford to lose. 

What Is Forex Trading? 

Forex, or FX, stands for foreign exchange: converting one currency into another. 

A traveler provides a simple example. Before visiting the United States, a South African traveler may exchange rand for US dollars. If the exchange rate changes before returning, the remaining dollars may convert back into more or fewer rand. 

Forex traders follow the same relationship between currencies, but they try to profit from changes in the exchange rate. Most market participants do this through leveraged products offered by brokers rather than by taking delivery of foreign banknotes. 

Forex has no single central exchange. Banks, financial institutions, companies, governments, investment funds and individual traders exchange currencies electronically across a global network. 

It is the world's largest financial market. The Bank for International Settlements reported average daily turnover of $9.6 trillion across global over-the-counter foreign exchange instruments in April 2025.  

This figure covers the wider FX market, not just retail trading. Financial centers operate in different time zones. Forex trading continues 24 hours a day from Monday to Friday. 

How Forex Trading Works 

Every forex trade involves a pair of currencies. A trader buys one currency and sells the other at the same time. Suppose USD/ZAR trades at 18.5000. The quote means that one US dollar costs R18.50.  

A trader who expects the dollar to strengthen against the rand could buy USD/ZAR. This position buys US dollars and sells rands. If 10,000 USD is bought at 18.5000 and closes the position at 18.6000, the calculation is: 

• Entry price: 18.5000 
• Exit price: 18.6000 
• Price change: 0.1000 
• Gross result: 10,000 x 0.1000 = R1,000 profit 

If USD/ZAR falls to 18.4000, the same long trade produces a gross loss of R1,000. This example assumes that the position opens and closes at the stated prices.  

In a live account, spread, commission, overnight financing, and slippage can reduce profit or increase loss. Retail forex positions usually settle as value changes rather than physical delivery of currency. 

Understanding Currency Pairs 

Currency pairs show the value of one currency relative to another. Each currency uses a three-letter code, such as USD for the US dollar, ZAR for the South African rand, and EUR for the euro. 

The first currency is the base currency. The second is the quote currency. 

In USD/ZAR: 

• USD is the base currency. 
• ZAR is the quote currency. 
• A price of 18.5000 means that R18.50 is required to buy $1. 

Currency pairs usually fall into three broad groups: 

• Major pairs include the US dollar and another heavily traded currency, such as EUR/USD, GBP/USD or USD/JPY. 
• Minor pairs combine major currencies without the US dollar. EUR/GBP and GBP/JPY are examples. 
• Exotic pairs combine a major currency with the currency of an emerging or smaller economy. USD/ZAR, EUR/ZAR, and GBP/ZAR are commonly placed in this group. 

Compared with major pairs, ZAR pairs often have wider spreads and sharper price swings. South African economic data, commodity prices, political developments, and global risk appetite changes all influence the rand. 

Going Long and Short 

Forex traders can take positions in either direction. 

A trader goes long, or buys, when expecting the base currency to strengthen against the quote currency. A trader goes short, or sells, when expecting the base currency to weaken. 

The table shows both directions using USD/ZAR at 18.5000. Each example uses a 10,000 USD position and excludes trading costs. 

Direction	Expected move	Closing price	Gross result
Long USD/ZAR	USD strengthens against ZAR	18.6000	R1,000 profit
Long USD/ZAR	USD weakens against ZAR	18.4000	R1,000 loss
Short USD/ZAR	USD weakens against ZAR	18.4000	R1,000 profit
Short USD/ZAR	USD strengthens against ZAR	18.6000	R1,000 loss

 

If the price movement is too small to cover the spread and other charges, a correct directional view may still produce little or no net profit. 

Pips and Price Movement 

A pip is a standard unit for measuring changes in a forex price. For most currency pairs, one pip equals 0.0001. For pairs involving the Japanese yen, one pip normally equals 0.01. 

If EUR/USD moves from 1.0850 to 1.0851, it has risen by one pip. If USD/ZAR moves from 18.5000 to 18.5100, it has risen by 0.0100, or 100 pips. 

Some platforms show an extra decimal place. This smaller unit is called a pipette or fractional pip. In a five-decimal EUR/USD price such as 1.08506, the final digit represents one-tenth of a pip. 

Pips measure price distance. Position size determines the monetary value of that distance. 

For a 10,000-unit USD/ZAR trade, one pip is worth R1: 

10,000 x 0.0001 = R1 per pip 

A 50-pip move is worth R50, while a 500-pip move is worth R500. These figures apply when profit or loss is calculated in rand. If the account uses another base currency, the broker may convert the result. 

Lots and Position Sizes 

Forex position sizes are often expressed in lots. One lot represents a set number of units of the base currency. 

Lot type	Currency units	USD/ZAR example	Approximate pip value
Standard lot	100,000	$100,000	R10 per pip
Mini lot	10,000	$10,000	R1 per pip
Micro lot	1,000	$1,000	R0.10 per pip

Some brokers also support positions smaller than one micro lot. 

A larger position makes each pip worth more. It increases potential profit and loss by the same proportion. 

Micro lots offer new traders more ability to fine tune position size, but a micro lot does not make a bad trade safe. The amount at risk also depends on the stop-loss distance. 

Instead of opening the largest position the account allows, the account holder should decide how much capital to risk. They should then set a stop-loss level and calculate the position size based on that limit. 

Bid, Ask, and Spread 

A forex quote contains two prices: 

• The bid is the price at which a trader can sell. 
• The ask is the price at which a trader can buy. 

The ask is higher than the bid. The difference is the spread, which forms part of the cost of trading. 

Suppose a broker quotes USD/ZAR at: 

• Bid: 18.5000 
• Ask: 18.5030 

The spread is 0.0030, or 30 pips. A long trade opens at the ask price of 18.5030. If it closes immediately at the bid price of 18.5000, a 10,000-unit position records about a R30 loss. 

Some account types charge a separate commission in return for lower quoted spreads. The fairest comparison therefore uses the total trading cost, not the advertised spread alone. 

Spreads may widen when liquidity falls, or volatility rises. Common examples include major economic announcements, unexpected political news, public holidays, and the period near the weekly market close. 

Leverage and Margin 

Leverage allows a trader to control a position worth more than the amount committed as margin. Margin is the portion of the account that the broker sets aside while the leveraged position remains open. 

At leverage of 1:30, a trader provides about R1 of margin for every R30 of exposure. A USD/ZAR position worth R18,500 would require approximately R616.67 in margin: 

R18,500 / 30 = R616.67 

The position still represents R18,500 of market exposure. A 2% move is worth about R370, though the required margin is much smaller.  

If losses reduce account equity below the broker's margin requirement, the broker may close one or more positions automatically. 

South African traders should confirm which legal entity holds the account, what leverage it offers, and which regulator oversees it.  

The FSCA does not apply the same blanket retail leverage limits used by regulators in some other jurisdictions. Broker terms vary, and accounts opened through offshore entities may not receive the same South African protections. 

Check the provider and relevant product entity on the FSCA register before depositing money. An FSP number on a website does not prove that every related brand, product, or overseas company has the same authorization. 

Forex Market Hours in South Africa 

The forex market operates 24 hours a day during the working week. Trading follows the opening hours of four major financial centers: 

1. Sydney 
2. Tokyo 
3. London 
4. New York 

The London and New York sessions overlap for several hours. This period often brings higher liquidity and narrower spreads in actively traded pairs. 

For South African traders, the London-New York overlap generally runs: 

• 14:00-18:00 SAST when London and New York observe daylight-saving time 
• 15:00-19:00 SAST when both operate on standard time 

The exact hours may differ briefly in March and October or November. The United States and the United Kingdom change their clocks on different dates.  

South Africa stays on SAST throughout the year. 

Who Trades Forex? 

Banks generate much of the activity in the forex market. Central banks and investment funds also exchange currencies to manage reserves or trade price movements.  

Multinational companies and other institutions use forex to offset risks and settle international payments. 

Retail traders form a much smaller part of the market and usually enter it through a forex broker. The broker supplies the platform, prices, account infrastructure, and order execution. It may also offer leverage, charts, and educational tools. 

South African traders should verify both the broker and the legal entity providing the trading product.  

Regulation can't stop the market from losing money. It does, however, provide traders with a framework for disclosure, conduct, and complaints.  

Pros and Cons of Forex Trading 

Forex trading offers the following advantages: 

• Access throughout the working week 
• High liquidity in major currency pairs 
• The ability to trade rising and falling prices 
• Demo accounts and small position sizes for practice 

It also carries drawbacks: 

• Prices can move sharply after economic or political news. 
• Leverage can quickly magnify losses. 
• Spreads, commissions, and financing charges reduce returns. 
• Scams and unlicensed providers remain a risk. 
• Developing a tested approach takes time and discipline.  

How to Start Trading Forex in South Africa 

Learn how orders, spreads, leverage and risk management work before opening a live trade. Compare brokers and verify the relevant legal entity on the FSCA register before making a deposit. 

A ZAR account may simplify deposits, withdrawals and record-keeping while reducing some conversion costs. Practice order entry, stop-loss placement and position sizing on a demo account first. 

Before trading live, write down the conditions required for an entry. Set the price that invalidates the idea and the maximum amount that can be lost.  

Frequently Asked Questions 

How do forex traders make money? 

Forex traders try to predict whether one currency will rise or fall against another, then close the position at a more favorable rate. The result depends on the number of pips gained and the position size, minus the spread, commissions, financing charges, and other fees. 

Is forex trading hard to learn? 

The basic mechanics are relatively easy to understand, but consistent profitability is difficult. Beginners often lose money while learning to manage risk, follow a strategy, and control emotional decisions. A demo account allows practice without putting real capital at risk. 

How much money is needed to start forex trading? 

Some brokers allow very small deposits through cent or micro accounts. Although R1,000 to R2,000 may offer more room for practicing small positions, no single starting amount suits every trader or broker. The minimum deposit is not the same as a sensible trading balance. Never trade money that cannot be afforded to lose.