Foreign exchange trading involves trading one currency pair against another, predicting that one currency will rise or fall against another. Currencies are traded in pairs, like the GBP British Pound versus the US Dollar (GBP/USD). Forex trading is similar to trading shares or futures except that when trading foreign exchange you are buying or selling one currency against another and you do not take delivery of the underlying currency.
One of the key advantages Forex has over other financial instruments is that relatively small lot sizes can be traded – lot sizes can be as small as 1000 units (one micro lot). Typically, foreign exchange also involves leverage which in some cases can be as high as 1:500, which is very different to trading shares where no leverage is involved. Leverage allows traders to trade with more money than they actually have in their trading account. For example, if you had 1:100 leverage you could use a $1,000 deposit to control $100,000 worth of currency. This can be seen as an advantage however it can also result in losses.