A forex position is always one currency against another. Retail traders usually hold it through leveraged broker products, while every international investor already holds currency risk without trading at all.
9 min read · Level 5
I think the most useful currency lesson for most investors has nothing to do with trading: it is noticing that a portfolio of foreign assets is also a portfolio of foreign currencies. That exposure is permanent and often large, and it gets far less attention than the leveraged retail market, which is small in most people's lives and loud in their advertising.
Currencies are quoted in pairs. In EUR/USD 1.1000, the first currency is the base and the second is the quote: one euro costs 1.10 US dollars. Buying the pair means buying euros and selling dollars; you profit if the euro strengthens against the dollar.
Term Meaning Example Base the currency being priced EUR in EUR/USD Quote the currency the price is stated in USD in EUR/USD Pip the usual smallest price step 0.0001 for most pairs Lot a standard trade size 100,000 units of base currency
On EUR/USD, one pip on a standard lot is 100,000 x 0.0001 = 10 US dollars.
Individuals reach currencies in several ways: spot trading through a broker, contracts for difference (CFDs) and spread bets where available, currency futures, and exchange-traded funds that track currencies. Most retail forex accounts use leverage, meaning the trader puts up a small margin to control a much larger position.
There is also a form of currency exposure almost every investor has without trading. Anyone holding shares, bonds or funds priced in a foreign currency gains or loses when that currency moves against their own.
Because the leveraged retail version and the portfolio version are completely different activities that share a name. One is short-term speculation with borrowed exposure. The other is a background risk in any international portfolio that deserves attention even if you never trade a currency.
It also matters who is on the other side. With many retail CFD and spot products, the counterparty is the broker itself, not an exchange, so the broker's regulation and financial strength become part of the risk.
And because a pair is relative, a view on one currency is never enough. A trade can lose even when the currency you favoured strengthens, if the other currency strengthens more.
This is educational information, not investment, securities or financial advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: UK FCA - information for consumers; U.S. CFTC - Commodity Futures Trading Commission; U.S. SEC - Investor.gov
An investor with no forex account still has currency risk.
They convert 10,000 US dollars into euros at 1.10, receiving 9,090.91 euros, and buy a European share fund.
Fund gain in euros +5% 9,545.45 euros Euro falls to 1.00 dollar 9,545.45 dollars Result in dollars -4.5%
The fund did well in its own currency. The investor lost money in theirs, because the euro fell about 9% against the dollar.
Believing currency risk only affects people who trade forex. Any foreign-currency holding moves with exchange rates, and the currency move can outweigh the investment's own return.
Before any trade, write which currency you are buying and which you are selling, and what move you need.
Check whether your broker routes to an exchange or takes the other side of your trades, and which regulator authorises it.
Add up holdings priced in each foreign currency, including funds, to see how much of your portfolio moves with exchange rates.
When considering a forex account, reviewing an international portfolio, or reading a currency quote.
Do not open a leveraged currency account because the market is open around the clock or because minimum deposits are low. Neither makes it more suitable.
The UK FCA and the European Securities and Markets Authority require providers of CFDs, including currency CFDs, to show retail clients a standardised warning stating the percentage of retail investor accounts that lose money with that provider, alongside leverage limits for retail clients.
If you are shown a forex or CFD product in these jurisdictions, find the provider's published loss percentage before reading anything else.
Create a free account to read the rest and apply it to your own investing.