How the Forex Market Works
Forex is the market where currencies trade against each other — by far the largest financial market in the world, and one of the least understood by people who trade it through a platform like MetaTrader. This guide walks through the mechanics that sit behind every quote on your screen: what a currency pair really is, how bid and ask prices work, what a pip measures, who is on the other side of your trade, and why the EUR/USD price in your terminal never exactly matches anyone else's.
Key takeaways
- A currency pair quotes one currency in units of another: in EUR/USD, the price is how many US dollars one euro costs.
- You always see two prices — you buy at the ask, sell at the bid, and the gap between them (the spread) is a cost you pay on every trade.
- A pip is the standard unit of price movement: 0.0001 for most pairs, 0.01 for JPY pairs.
- Forex has no central exchange. Banks, dealers and brokers quote prices over-the-counter, which is why quotes differ slightly between brokers.
- Those small differences in price, spread and execution are one reason identical strategies can produce different results on different accounts.
A currency pair is a price for one currency in another
Every forex quote describes an exchange rate between two currencies. The pair EUR/USD at 1.0850 means one euro costs 1.0850 US dollars. The first currency in the pair is what you are actually buying or selling; the second is what you pay or receive in.
Base currency (EUR)
The first currency in the pair — the thing being priced. Trade sizes are measured in it: one standard lot of EUR/USD is 100,000 euros.
Quote currency (USD)
The second currency — the unit the price is expressed in. Profits and losses on the pair accrue in the quote currency before any conversion to your account currency.
Buying EUR/USD means buying euros and paying in dollars — a position that gains if the euro strengthens against the dollar. Selling the pair is the reverse. There is no “up” or “down” market in forex in the way a stock index has one: every move is one currency measured against another.
Bid, ask and the spread
Your platform always shows two prices. The bid is what buyers in the market are currently willing to pay — the price at which your sell order fills. The ask is what sellers are asking — the price at which your buy order fills. The ask is always slightly higher.
Bid — you sell here
1.0848
Spread
2 pips
Ask — you buy here
1.0850
The gap between the two is the spread, and it is the most visible cost of trading. A position is briefly underwater the moment it opens, because it was bought at the ask and would have to be sold at the lower bid. Spreads are not fixed — they widen when liquidity is thin or volatility spikes, which is covered in detail in the spread guide.
Pips: how price moves are measured
A pip is the conventional unit of price movement. For most pairs it is the fourth decimal place (0.0001); for pairs quoted in Japanese yen it is the second (0.01). Most brokers also quote a fifth, smaller digit — a point or fractional pip — which is one tenth of a pip.
Pip value per lot = pip size × contract size
- pip size
- 0.0001 for most pairs, 0.01 for JPY-quoted pairs
- contract size
- 100,000 units of the base currency per standard lot
On a one-lot EUR/USD position, a pip is worth 0.0001 × 100,000 = $10. That single number links price movement to money, which is why position sizing starts with it: a 25-pip stop loss on one lot risks roughly $250, on 0.1 lots roughly $25.
Who is actually trading
Retail orders are a small slice of the market. According to the BIS Triennial Survey — the reference census of the FX market — daily turnover runs in the trillions of dollars, and most of it happens between institutions:
Major banks & dealers
Quote prices to each other and to clients all day. Their quotes form the core of the interbank market.
Central banks
Hold and manage currency reserves; their policy decisions move rates even when they are not trading.
Funds & asset managers
Hedge international portfolios and take positions on currencies as an asset class.
Corporations
Convert revenue and hedge costs across borders — a constant source of real-economy flow.
Brokers & aggregators
Bundle liquidity from dealers and stream tradeable prices to retail platforms such as MetaTrader.
Retail traders
Trade through brokers in lot sizes from 0.01 upward — price takers at the end of the chain.
A market with no centre
Stocks trade on exchanges with one official price and one closing bell. Forex does not. It is an over-the-counter (OTC) market: a global network of banks, dealers and electronic venues quoting prices to one another, around the clock from Monday morning in Asia–Pacific to Friday evening in New York.
Decentralization has practical consequences for anyone reading a MetaTrader chart:
- There is no single official price — only the prices each participant is quoted by its counterparties.
- There is no official open or close, so daily candles depend on the broker’s server timezone.
- Volume shown in a retail platform is the broker’s own tick count, not the market’s total volume.
Why prices differ slightly between brokers
Because every broker assembles its price feed from its own liquidity providers, two brokers will quote the same pair slightly differently at the same instant. The differences are usually fractions of a pip, but they are structural, not glitches:
| Source | What it does to the quote |
|---|---|
| Liquidity providers | Different banks feeding different raw prices to each broker. |
| Spread model | Each broker adds its own markup, or charges commission on a rawer price. |
| Server time | Candle open/close times shift, so the same data draws different bars. |
| Filtering | Brokers smooth or filter ticks differently, changing highs and lows slightly. |
A worked EUR/USD example
Buying and closing one mini lot
- Quote: EUR/USD bid 1.0848 / ask 1.0850 (2-pip spread).
- Buy 0.10 lots (10,000 EUR) — order fills at the ask: 1.0850.
- Pip value at 0.10 lots = 0.0001 × 10,000 = $1 per pip.
- Price rises and you close (sell) at the new bid: 1.0890.
- Move = 1.0890 − 1.0850 = 40 pips → gross profit = 40 × $1 = $40.
- The 2-pip spread was paid implicitly: entry at ask instead of bid cost $2 of that move.
Run the same numbers for your own pairs and sizes with the free Pip Value Calculator and Position Size Calculator.
Frequently asked
What does the EUR/USD price actually mean?
It is the number of US dollars one euro costs. If EUR/USD shows 1.0850, one euro buys 1.0850 dollars. Buying the pair means buying euros and paying in dollars; selling means the reverse.
Why do I see two prices for every pair?
The bid is the price at which you can sell the base currency; the ask is the price at which you can buy it. The ask is always slightly higher, and the difference — the spread — is a transaction cost built into every trade.
Why is the forex market open 24 hours on weekdays?
Because it is decentralized. Trading follows the world's financial centres — Sydney, Tokyo, London, New York — so as one region's business day ends, another's begins. There is no single exchange that opens and closes.
Why does my broker's price differ from a chart I see online?
There is no single official forex price. Each broker aggregates quotes from its own liquidity providers, applies its own spread, and runs on its own server time. Small differences in price and candle shape between brokers are normal.
Related guides
What Is Spread in Forex?
The bid/ask gap as a per-trade cost: fixed vs variable spreads, why they widen, and what frequent trading adds up to.
What Is a Pip in Forex?
The fourth-decimal (second for JPY) unit of price movement, points and fractional pips, and how pips turn into money.
Why Forex Prices Move
Interest rates, inflation, central banks, risk sentiment, data and liquidity — and how they interact.
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Sources & further reading
- BIS Triennial Central Bank Survey — OTC foreign exchange turnover — the reference survey for the size and structure of the global FX market.
- ECB — What is the foreign exchange market? — central-bank explainers on currencies and exchange rates.
- MetaTrader 5 Help — Price charts and quotes — how MetaTrader displays bid/ask prices and market depth.
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This article is for educational purposes only. It does not provide trading signals, investment advice, financial recommendations, broker recommendations or trade execution.