Forex is the foreign exchange market where currencies are traded against each other in pairs. The foreign exchange market consists of currencies from every country, traded 24 hours a day, Monday through to Saturday.
Forex trading works by buying one currency against another currency. The currencies are always in pairs with the first currency in the pair (the one on the left) called the ‘base’ currency, whilst the other currency in the pair (on the right) is called the ‘counter’ currency.
Example: EUR/USD – the EUR (Euro) is the base currency and the USD (US Dollar) is the counter currency.
Profit (or loss) is made by one currency appreciating or depreciating against the other currency in a currency pairing.
You buy a currency pair if you believe the base currency will strengthen against the counter currency. You sell a currency pair if you believe the base currency will weaken against the counter currency.
Profit is measured in Pips – Percentage in Points. Nearly all currency pairs are quoted to 5 decimal places with the change in the final decimal place – referred to as a ‘pip’. For example, the EUR/USD is valued at 1.3542 – the 2 at the end is the pip. If the price of the EUR/USD rose to 1.3544, then the EUR/USD is said to have risen 2 pips.
When buying or selling a currency there is always a two price quotation – A bid price and an ask price. The difference between the prices is called the spread. The bid price represents the maximum price that a buyer is willing to pay for a currency, whilst the ask price represents the minimum price that a seller is willing to receive for the currency.
Forex trades are leveraged, in the case of Forex brokers, leverage of 100:1 is offered. This means that every trade is magnified by 100 times, enabling higher profits as the trader is able to increase the amount being purchased.