What you'll learn
- Explain what the forex market is and what is actually traded
- Describe why it is the largest and most liquid market
- Recognise that retail traders reach it through a broker
Currencies are traded in pairs
You cannot buy a currency on its own, because every currency is only worth something in terms of another. When you buy euros you pay for them in something else, usually dollars, so a forex trade is always a swap of one currency for another. That is why forex prices are written as pairs such as EUR/USD, and why a trader who expects the euro to strengthen against the dollar buys EUR/USD and one who expects it to weaken sells it.
The price of a pair is the exchange rate. EUR/USD at 1.1000 means one euro costs 1.1000 dollars. If the number rises the euro has strengthened against the dollar; if it falls the dollar has strengthened against the euro.
Where the market lives
There is no forex exchange in the way there is a stock exchange. The market is a network of banks and other institutions dealing directly with each other, which is why it is described as over the counter. Prices are set by whoever is quoting at that moment, and because banks in Sydney, Tokyo, London and New York are all quoting during their own business hours, somebody is always open.
Retail traders do not deal with those banks. They open an account with a forex broker, which quotes them a price drawn from that network and stands between them and the market. The broker is the subject of the whole second course, because choosing one is the first real decision a new trader makes.
How big it is
The Bank for International Settlements surveys the market every three years and the most recent figure was around 7.5 trillion dollars traded per day. Most of that is banks, funds and corporations; retail trading is a small slice. The size matters to you for one reason: in the major pairs there is always somebody willing to take the other side of a trade, so prices move smoothly and the cost of getting in and out is small.
Example: A first trade in plain words
Suppose EUR/USD is 1.1000 and you think the euro will strengthen. You buy 10,000 euros, which costs 11,000 dollars in notional terms. A day later the price is 1.1100 and you sell. Your 10,000 euros now buy 11,100 dollars, so you have made 100 dollars before costs. Had the price fallen to 1.0900 you would have lost 100 dollars instead. Every forex trade is that simple underneath; everything else in this course is about the details that decide whether it works.
Key takeaways
- Forex is the exchange of one currency for another, always quoted as a pair.
- It is an over-the-counter market with no central exchange, open around the clock on weekdays.
- It is the largest market in the world, which keeps major pairs cheap to trade.
- Retail traders reach it through a broker.
Knowledge check
Trading forex, CFDs and other leveraged products carries a high risk of losing money. This lesson is general education, not advice. Risk disclosure.