Your CFD sits at the far edge of that market. Your provider sets its price using quotes from banks. If the company that opens your account is regulated in the EU, the UK or Australia, the retail limits on leverage apply to it. This page covers how pairs are quoted and what a pip and a lot are worth. It also covers when the market is busiest, what really moves exchange rates, and why the overnight charge on a currency trade can end up being paid to you.
Key points
- A currency pair is quoted as base against quote. Its price shows how many units of the second currency, the quote, one unit of the first currency, the base, will buy.
- Two things set how much a pip is worth: the size of your trade and the quote currency. For a standard lot of a pair quoted in US dollars, one pip equals ten dollars.
- ESMA and the FCA cap leverage for retail traders if the company that opens your account is regulated in the EU or the UK. Pairs made from two of six major currencies have a 30:1 cap, while all other pairs are capped at 20:1 (ESMA press release, 27 March 2018, FCA PS19/18).
- The spread, the gap between the buy and sell price, changes through the day, as does a pair’s liquidity, how easily it trades. The busiest hours come when London and New York are both open. The quietest stretch falls around the daily rollover, your provider’s cut-off for overnight charges.
- The overnight charge on a currency CFD is called swap, and it comes from the difference between the two currencies’ interest rates. So one direction of the pair earns the swap and the other pays it, before your provider adds its mark-up.
Currency pairs: base, quote, majors, minors and exotics
Currency pairs are how forex is priced and traded. Every price is the value of one currency counted in another. Every trade buys one currency and sells the other at the same time.
Base and quote currency
The first currency in a pair is the base currency, and the second is the quote currency. For EUR/USD at 1.1000, one euro buys 1.1000 US dollars. When you buy EUR/USD, you buy euros and sell dollars. When you sell it, it’s the other way round. Your profit or loss is calculated in the quote currency, and your provider converts it into your account currency (currency conversion).
Major pairs
Major pairs, as traders use the term, are the most traded pairs, each with the US dollar on one side, such as EUR/USD, USD/JPY and GBP/USD. They have the narrowest spreads. If the company that opens your account is regulated in the EU or the UK, the retail leverage limits use a separate legal list of six major currencies. They are the US dollar, the euro, the Japanese yen, the pound sterling, the Canadian dollar and the Swiss franc. Any pair made from two of them gets the highest leverage allowed, 30:1 for retail clients (ESMA Decision (EU) 2018/796, ESMA press release, 27 March 2018). A retail client is an ordinary individual trader, the group that gets the most protection under the rules.
Minor and exotic pairs
Minor pairs, also called crosses, are those without the US dollar. EUR/GBP and EUR/AUD are two examples. Exotic pairs match a major currency with one from a smaller or emerging economy. Both usually have wider spreads and less trading behind them than dollar pairs. At an EU or UK company, the retail leverage cap doesn’t follow these market labels. It follows the legal list of six currencies. EUR/GBP is made from two of them, so it gets 30:1 even though traders call it a cross. EUR/AUD and all exotic pairs are capped at 20:1 (ESMA Decision (EU) 2018/796). At a company regulated in Australia, the ASIC list includes the Australian dollar, so EUR/AUD gets 30:1 there (ASIC order). Exotic pairs can also come with a big gap between the two interest rates. That makes the swap on them large, whether it’s charged to you or paid to you.
Pips, lots and pip value
Worked arithmetic: the numbers follow from the formula given in this section.
A pip is the standard unit for a price move in a currency pair. For most pairs it equals one ten-thousandth of the quote currency, or 0.0001, while yen-quoted pairs use one hundredth (0.01). Providers often display an extra decimal place, worth a tenth of a pip.
A lot is the standard trade size of 100,000 units of the base currency. You trade 10,000 units in a mini lot and 1,000 units in a micro lot. Pip value is the money you make or lose for each pip the price moves. To get pip value, multiply your trade size by the pip size.
One standard lot of EUR/USD works out to 100,000 × 0.0001 = 10 US dollars per pip. A mini lot brings that down to one dollar a pip, and a micro lot to ten cents. When the quote currency differs from your account currency, your provider converts the pip value at the current rate. The pips and lots page gives you the formulas for pip value and position size.
Pip value and margin together show how quickly a forex trade can go wrong. Margin is the deposit your provider holds while your trade is open. Say you trade a standard lot of a pair priced near 1.10 at an EU or UK company. At its 3.33 % retail margin you need about 3,663 of margin, and each pip is worth 10. As a rough example, a major pair such as EUR/USD often covers somewhere around 50 to 100 pips in a day. A 100-pip move against you comes to 1,000. That amount is about 27 % of your margin. The leverage and margin page works a full example all the way to the close-out point, where your provider closes the trade because your account has run too low.
Trading sessions and liquidity
Forex trading sessions move with the sun. The market stays open non-stop from the Sydney open on Monday morning until the New York close on Friday evening. How busy it is depends on which financial centres are at work, and the trading hours page shows the clock times.
| Session | Centres | How busy it usually is | What it means for a CFD |
|---|---|---|---|
| Asia-Pacific | Sydney, Tokyo, Singapore, Hong Kong | Moderate, with yen and Australian dollar pairs the most active | Narrow ranges and wider spreads on euro and dollar pairs |
| Europe | London, Frankfurt, Zurich, Paris | High. London is the largest single centre | The tightest spreads on European pairs, and scheduled European data |
| Europe and America overlap | London and New York together | Highest of the day | The busiest period. US data releases come out during it |
| America | New York, Toronto | High, then falling after London closes | Trading thins out towards the close and spreads widen |
| Daily rollover and weekend | The provider’s cut-off. The market is closed from Friday evening to Sunday evening | Very low or none | Financing is charged at the cut-off. Prices can gap, jumping straight to a new level, when the market reopens on Sunday evening |
Liquidity is important when you trade a CFD because your provider’s spread tracks it. The same pair can cost several times more to trade at the daily rollover than when London and New York are both open. Stop orders that stay active through the quiet hours are the most likely to suffer slippage. Slippage means they fill at a different price from the one you set, usually worse and now and then better (how a trade works).
What drives exchange rates
What drives exchange rates depends on the timescale you look at. Over months, what matters most is the difference in interest rates and inflation between two economies. Over days, the drivers are scheduled data and central-bank decisions. Over hours, it comes down to how much risk investors are willing to take across all markets at once.
Interest-rate differentials
Interest-rate differentials, the gaps between two countries’ interest rates, are the main slow driver. Money tends to flow towards the currency whose central bank pays more. That’s why expectations about the European Central Bank, the Federal Reserve and the Bank of England move the euro, the dollar and the pound before the decisions come out (ECB monetary policy decisions, FOMC meeting calendar, Bank of England monetary policy). The same gap is what the swap on a currency CFD is built from.
Scheduled data
Scheduled data releases can move exchange rates in minutes because they shift what the market expects from interest rates. Employment, inflation and growth numbers get the most attention, and an economic calendar shows when each release is due. Among the month’s most watched reports is the US employment release from the Bureau of Labor Statistics (Employment Situation). The fundamental analysis page explains how markets price in a release ahead of time, and why prices react to the surprise in the figure instead of the figure itself.
Risk sentiment
Risk sentiment is the mood that decides how much risk investors are willing to take. This mood moves currencies in groups. Currencies with high interest rates or big commodity exports tend to fall together when shares and commodities sell off together. The US dollar, the yen and the Swiss franc tend to rise, whatever is happening in their own economies. So if you’ve bought several high-interest currencies, you really hold one big trade split into pieces. That’s how the risk management page treats it.
Swap and carry: why the overnight charge can be a credit
Swap on a currency CFD is the overnight charge, or credit, for holding the trade past the daily cut-off. Because a currency trade buys one currency and sells another, swap works differently from overnight financing on other CFDs. On paper, you earn interest on the currency you bought and pay interest on the currency you sold.
Take a case where the base currency’s interest rate is higher than the quote currency’s. A buy trade then receives the difference in rates, and a short position, a trade that gains when the pair falls, pays it. If the base rate is lower, the payments reverse. Your provider takes its mark-up from both sides. A trade that receives the difference gets less than the rate banks use with each other, while a trade that pays the difference pays more (costs and fees).
Carry is a trade you hold to receive the interest difference, so you collect it night after night. It only works while the exchange rate doesn’t move against you by more than the interest earns. One sharp move can wipe out months of carry in a week when investors rush for safety. The trading strategies page sets out what carry needs to work and how it fails.
Risk warning
Forex CFDs carry the highest leverage the retail rules allow
Forex CFDs carry the highest leverage the retail rules allow. For pairs of the major currencies the limit is 30:1, if the company that opens your account is regulated in the EU or the UK. With a fully leveraged trade, a shift of about 3.3 % against you destroys every bit of margin behind it (ESMA Decision (EU) 2018/796). A global company in the same group sets its own leverage. A daily move of that size in a major pair is unusual, though it becomes ordinary over a few weeks. The spread, the swap and any weekend gap all work on your trade as well.
Common questions about forex trading
Common questions about forex trading start with what forex is and how a currency trade works.
What is forex?
Forex, short for foreign exchange and also written as FX, is the market where one currency is exchanged for another. Banks, companies, funds and governments trade in it day and night, Monday to Friday. A forex CFD tracks the exchange rates those players set.
What is forex trading and how does it work?
Forex trading means you buy one currency and sell another at the same time. You gain or lose as the exchange rate between them moves. Trades in a pair such as EUR/USD come in sizes called lots, and the pair’s price moves in pips. A CFD means you put down margin and never take delivery of either currency.
What is a currency pair?
A currency pair quotes two currencies against one another. EUR/USD is one example. The base currency is the first in the pair, the quote currency the second. The price tells you how much of the quote currency a single unit of the base buys.
What happens when the forex market closes?
When the forex market closes on Friday evening in New York, any trade you have open stays open through the weekend. You can’t close it until the market reopens, and the new week’s first price can be a long way from Friday’s last. The trading hours page lays out the trading week.
How do you start forex trading?
Starting forex trading takes an account with a regulated provider and an understanding of pips, lots and margin. Many people first practise on a demo account. The how to start trading page walks a beginner through the steps. The is forex and CFD trading safe page covers the risks and how to check a provider.
Sources
The original documents this page cites, in the order they first appear.
- Bank for International Settlements, BIS
- Triennial Central Bank Survey of foreign exchange and OTC derivatives markets in 2022, Bank for International Settlements, 2022-10-27
- European Securities and Markets Authority, ESMA
- Financial Conduct Authority, FCA
- ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors, ESMA, 2018-03-27
- PS19/18: Restricting contract for difference products sold to retail clients, FCA, 2019-07-01
- ESMA Decision (EU) 2018/796 of 22 May 2018 to temporarily restrict contracts for differences in the Union, Official Journal of the European Union (EUR-Lex), 2018-05-22
- Australian Securities and Investments Commission, ASIC
- 20-254MR ASIC product intervention order strengthens CFD protections, ASIC, 2020-10-23
- European Central Bank, ECB
- Board of Governors of the Federal Reserve System, Federal Reserve
- Bank of England, Bank of England
- Monetary policy decisions, statements & accounts, European Central Bank
- Meeting calendars and information (FOMC), Federal Reserve
- Monetary policy, Bank of England
- U.S. Bureau of Labor Statistics, BLS
- Employment Situation, U.S. Bureau of Labor Statistics