What is Forex?
Forex (short for foreign exchange, also called FX) is the global market where one currency is swapped for another. Every time a company pays a foreign supplier, a tourist changes money, or a trader bets on the euro, a forex trade happens.
Currency Exchange in Plain English
A currency only has a price in terms of another currency. You cannot ask "what is the euro worth?" on its own. You ask "how many US dollars does one euro buy?"
That is why currencies always trade in pairs, such as EUR/USD. The price tells you how much of the second currency you need to buy one unit of the first.
Example
EUR/USD = 1.0850
This means 1 euro costs 1.0850 US dollars.
If the price rises to 1.0900, the euro got stronger (or the dollar got weaker): one euro now buys more dollars.
Note: You will learn exactly how pairs and prices are written in Currency Pairs and Reading Quotes.
A Trip Abroad: Your First Forex Trade
If you have ever travelled to another country, you have already traded forex. The only difference between you and a trader is the reason for the trade.
Example: A holiday in Paris
Before the trip: EUR/USD = 1.0850 You change $1,000 into euros: $1,000 ÷ 1.0850 = €921.66 You don't spend it. Two weeks later EUR/USD = 1.1000 You change the €921.66 back into dollars: €921.66 × 1.1000 = $1,013.83 Result: +$13.83 (before exchange fees)
You made money because the euro rose against the dollar while you held it. If EUR/USD had fallen, you would have got back less than $1,000.
A forex trader does the same thing, but on purpose, on a screen, and usually without ever holding the actual banknotes.
Tip: Real exchange kiosks charge a much wider gap between their buy and sell price than online brokers. This gap is called the spread. It is the main cost of trading.
A Market With No Building
Stocks often trade on a central exchange, such as the New York Stock Exchange. Spot forex does not. It is an over-the-counter (OTC) market. That means trades happen directly between two parties over electronic networks, not in one central place.
- Decentralized: thousands of banks, funds, brokers and companies around the world quote prices to each other.
- No single price: two brokers may show slightly different prices for EUR/USD at the same moment.
- Huge: the Bank for International Settlements (BIS) measured average turnover of about $9.6 trillion per day in April 2025, making it the largest financial market in the world.
Info: "Turnover" counts all FX deals, including swaps and forwards used by banks and companies. Spot trading, the kind most retail traders do, is roughly a third of the total.
Why Exchange Rates Move
A currency's price moves because supply and demand for it change. More buyers than sellers pushes the price up. More sellers pushes it down. The main forces behind that are:
Interest rates
Higher rates tend to attract money into a currency, because investors earn more holding it.
Economic data
Jobs, inflation and growth figures change what traders expect central banks to do next.
Trade and capital flows
A country that exports a lot sees steady demand for its currency from foreign buyers.
Risk mood and news
In a crisis, money often runs to "safe havens" such as the US dollar, Japanese yen and Swiss franc.
You will study these drivers in depth in Fundamental Analysis and Central Banks & Rates.
Who Trades Forex?
Most forex volume has nothing to do with speculation. It comes from real-world needs:
| Participant | Why they trade |
|---|---|
| Central banks | Manage reserves, steady their currency, set interest rates |
| Commercial & investment banks | Serve clients and trade with each other (the interbank market) |
| Companies | Pay suppliers abroad, convert foreign sales, hedge currency risk |
| Funds & asset managers | Buy foreign stocks and bonds, hedge, or speculate |
| Retail traders | Speculate on price moves through an online broker |
See Market Participants for the full picture.
Spot vs Futures vs CFDs
There are several ways to trade currencies. Beginners will mostly meet the first and the last.
| Product | What it is | Where it trades |
|---|---|---|
| Spot forex | Exchange at today's price. Officially settles in two business days (T+2). Retail brokers roll your position over each night instead, charging or paying a small "swap". | OTC, through banks and brokers |
| Forwards | A private deal to exchange at a fixed rate on a future date. Used by companies to lock in costs. | OTC |
| Futures | Standardized contracts with fixed sizes and expiry dates. One CME euro futures contract (6E) is €125,000. | Central exchange (e.g. CME) |
| CFDs | A "contract for difference": you never own the currency, you just settle the price change in cash with your broker. | OTC, with a broker. Not available to US retail clients. |
Note: In the US, retail traders use spot forex with brokers registered with the CFTC and members of the NFA. In the UK, EU and Australia, most retail forex is offered as CFDs or rolling spot, regulated by the FCA, CySEC (and other EU regulators) and ASIC.
Open 24 Hours, 5 Days a Week
Because there is no central exchange, forex follows the sun. As one financial center closes, another opens. The trading week runs from Sunday about 5 pm New York time (when Sydney and Wellington open) to Friday 5 pm New York time.
- Sydney / Wellington open the week.
- Tokyo takes over the Asian session.
- London opens: the busiest session.
- New York overlaps with London, then closes the day.
Warning: Open 24 hours does not mean equally busy 24 hours. Prices can be thin and spreads wide around the daily rollover and over weekends, when prices can "gap". More in Trading Sessions.
How Traders Profit: Long vs Short
When you trade a pair, you always buy one currency and sell the other at the same time. This lets you profit whether a price goes up or down.
Going long (buy)
You buy the pair because you think the first currency will rise. You profit if the price goes up.
Going short (sell)
You sell the pair because you think the first currency will fall. You profit if the price goes down.
Example: Long EUR/USD
Buy 0.10 lot (10,000 euros) at 1.0850 Sell (close) at 1.0900 Move: 1.0900 − 1.0850 = 0.0050 = 50 pips Each pip on 0.10 lot = $1 Profit: 50 × $1 = +$50
Example: Short GBP/USD
Sell 0.10 lot (10,000 pounds) at 1.2700 Buy (close) at 1.2650 Move: 1.2700 − 1.2650 = 0.0050 = 50 pips Profit: 50 × $1 = +$50 (If price had risen to 1.2750 instead: −$50)
Risk warning: Every trade can lose as easily as it can win. Most retail traders lose money, especially with high leverage. Learn on a demo account first, and never trade money you cannot afford to lose.
Test Yourself With Exercises
What does "OTC" mean for the forex market?
- All trades go through one central exchange in London
- Trades happen directly between parties over networks, with no central exchange
- Only banks are allowed to trade
EUR/USD is 1.0850. You think the euro will fall against the dollar. What do you do?
- Buy EUR/USD (go long)
- Nothing: you can only profit when prices rise
- Sell EUR/USD (go short)
You change $2,000 into euros at EUR/USD 1.0000, then change back at 1.0500. How many dollars do you get (ignoring fees)?
- $2,100
- $1,900
- $2,050
- $2,000
Which product trades on a central exchange with standardized contract sizes?
- Spot forex
- Currency futures
- CFDs
When is the forex market normally open?
- Monday to Friday, 9 am to 5 pm London time
- Every day, 24 hours, including weekends
- Only during the New York session
- From Sunday evening to Friday evening (New York time), 24 hours a day