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Forex basics
Foreign exchange, or forex, is the global market for trading one currency against another. Here is how it is structured and quoted.
What is the forex market?
The foreign-exchange market is where currencies are exchanged for one another. It is decentralised, meaning there is no single physical exchange; trades happen electronically between a worldwide network of banks, institutions and individuals. Because the market spans time zones, it operates around the clock on weekdays, opening in the Asia-Pacific session and rolling through Europe and the Americas.
Currency pairs: base and quote
Currencies are always traded in pairs, because buying one currency means selling another. A pair such as EUR/USD has a base currency (the first one, here the euro) and a quote currency (the second, here the US dollar). The price tells you how much of the quote currency is needed to buy one unit of the base currency. If EUR/USD is 1.0850, one euro is worth 1.0850 US dollars.
- Major pairs involve the US dollar against other large economies, for example EUR/USD, USD/JPY and GBP/USD.
- Cross pairs do not include the US dollar, such as EUR/GBP or EUR/JPY.
- Exotic pairs combine a major currency with one from a smaller or emerging economy; these tend to be less liquid and more volatile.
Pips and price movement
A pip is the standard unit used to describe a change in a currency pair's price. For most pairs it is the fourth decimal place (0.0001); for pairs quoted in Japanese yen it is usually the second decimal place. If EUR/USD moves from 1.0850 to 1.0851, that is a one-pip move. Pips make it easy to talk about movements consistently across different pairs.
Who takes part?
Central banks, commercial banks, corporations hedging international revenue, asset managers and individual traders all participate for different reasons. Prices reflect the constant push and pull of supply and demand, shaped by interest-rate expectations, economic data, geopolitics and market sentiment. No single participant controls the direction of a freely floating currency.
Why beginners underestimate the difficulty
Forex looks simple — a price can only go up or down — but that simplicity is deceptive. Movements are driven by countless interacting factors, leverage can magnify small moves into large gains or losses, and short-term price action is extremely noisy. Understanding the mechanics is the first step; respecting the risk is the more important one.
Risk warning. Trading foreign exchange and contracts for difference (CFDs) is high risk and can lead to the loss of all invested capital. The majority of retail investor accounts lose money when trading CFDs. The material on this website is general education only, is not financial advice, and is not an offer or solicitation to trade.