What is Forex and how the currency market works

What is the Forex market?

Forex is the most liquid market in the world, with daily turnover exceeding USD 7 trillion.

Market participants

• Central and commercial banks
• Hedge funds and institutions
• Retail brokers and traders

Currency pairs

Majors include EUR/USD, GBP/USD, USD/JPY, USD/CHF. Beginners typically start with EUR/USD because of its liquidity and tight spreads.

Understanding the market's structure is the foundation of sustainable trading.

How to read a currency quote

EUR/USD at 1.0800 means one euro is worth 1.08 US dollars. The first currency is the base and the second is the quote. A rising price means the base is strengthening relative to the quote.

Bid, ask, and spread

• Bid is the price at which the market buys from you.
• Ask is the price at which the market sells to you.
• Spread is the difference and becomes an immediate transaction cost.
• Spreads can widen around major news, thin liquidity, and the daily rollover.

Pips and contract size

A pip is a standardized price increment. Most pairs use the fourth decimal place; JPY pairs commonly use the second. The cash value of a pip depends on the pair, contract size, current price, and account currency.

Trading sessions

The market moves through Asian, London, and New York centers. Participation, volatility, and transaction costs vary by session, so do not assume identical conditions throughout the day.

Beginner pre-trade checks

• Pair and account currency
• Contract size and platform-reported pip value
• Spread, commission, and swap
• Scheduled economic news
• Maximum acceptable loss before entry

Exercise: choose one pair, identify its base and quote currencies, then calculate the cash value of a 20-pip move using data from a demo platform.

Origins and development of the FX market

Foreign exchange begins with real economic needs. An importer buys foreign currency to pay a supplier, an exporter converts receipts, a government manages reserves, and a fund hedges an overseas asset. The modern market is therefore not one centralized exchange. It is a global network of banks, liquidity providers, electronic venues, brokers, corporations, public institutions, and investors.

The BIS Triennial Survey is the standard reference for market size and structure. Every turnover figure should retain its survey year, reference month, and definition. Turnover aggregates transactions across instruments; it is neither net investment nor money earned by market participants.

Reading a currency quotation

EUR/USD at 1.1000 says that one euro costs 1.10 US dollars. EUR is the base and USD the quote currency. A buyer benefits only if the position is later closed above its total cost after spread, commission, financing, and slippage. Economically, buying a pair buys its base while selling its quote.

Quotes have bid and ask sides. A long normally opens at the ask and is valued for closing at the bid; a short does the reverse. That difference is an immediate transaction cost. It may widen in thin liquidity, around the trading-day rollover, or during major announcements.

Spot, forwards, swaps, and retail products

Institutional FX includes spot, outright forwards, FX swaps, currency swaps, and options. A retail account may instead offer rolling spot or a CFD. Legal form, delivery, pricing, and counterparty exposure vary. Read the product disclosure and the rules applicable in your country; an app interface does not prove direct access to the interbank market.

Why exchange rates move

Prices respond to interest-rate differences, inflation, growth, capital flows, hedging demand, risk appetite, and new information that changes expectations. One event can produce different reactions when the prior expectation differs. Record both the consensus before a release and the reported outcome instead of memorizing a deterministic news-to-price rule.

Applied exercise

Choose one pair and label its base, quote, bid, ask, spread, and the closing side for a long and short. Observe the spread at three times without placing a live order. Explain what changed in cost and apparent liquidity. The task tests market mechanics, not directional prediction.