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What is forex?

The foreign exchange market (currencies, Forex or FX') is a market where participants buy, sell, exchange and speculate on currencies. In particular, it consists of trading one currency for another, ex: EUR/USD. This means trading the euro against the US dollar. Forex and related markets is the largest and most liquid financial market in the world, where the average trade consists of trillions per day. Trading foreign exchange may have various advantages because of its transparency, direct dealing, significant trading volumes, extreme liquidity and the great number of participants in the market including governments, central banks, banks, financial institutions, corporations, private investors, etc.

All forex trades involve two currencies because you're betting on the value of a currency against another. Think of EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the base, and USD, the second, is the counter. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buy price and one is the sell. The difference between the two is the spread. When you click buy or sell, you are buying or selling the first currency in the pair.

 

FOREX TRANSACTION BASICSForex Transaction Basics video for FXCM2:03

Let's say you think the euro will increase in value against the US dollar. Your pair is EUR/USD. Since the euro is first, and you think it will go up, you buy EUR/USD. If you think the euro will drop in value against the US dollar, you sell EUR/USD.

 

If the EUR/USD buy price is 0.70644 and the sell price is 0.70640, then the spread is 0.4 pips. If the trade moves in your favor (or against you), then, once you cover the spread, you could make a profit (or loss) on your trade.

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