The foreign exchange market is where one currency is exchanged for another. It has no single exchange building: banks, brokers, funds, companies and individuals trade through a network of dealers, which is why it is called an over-the-counter market. It is open around the clock on weekdays.
Currency pairs
Currencies are quoted in pairs. In EUR/USD the euro is the base currency and the US dollar is the quote currency. A price of 1.1000 means one euro costs 1.1000 US dollars. Buying the pair means buying the base and selling the quote. Selling does the opposite.
Bid, ask and spread
Every pair has two prices. The bid is the price at which you can sell, and the ask is the price at which you can buy. The gap between them is the spread, and it is the most basic cost of a trade. If EUR/USD shows 1.10000 / 1.10010, the spread is 1 pip.
Pips, lots and pip value
| Term | Meaning | Example |
|---|---|---|
| Pip | The standard unit of price movement: 0.0001 for most pairs, 0.01 for pairs quoted in yen | EUR/USD moving from 1.1000 to 1.1001 is 1 pip |
| Standard lot | 100,000 units of the base currency | 1 lot of EUR/USD is €100,000 |
| Mini lot | 10,000 units (0.10 lot) | 0.10 lot of EUR/USD is €10,000 |
| Micro lot | 1,000 units (0.01 lot) | 0.01 lot of EUR/USD is €1,000 |
On a pair quoted in US dollars, one pip on one standard lot is worth about US$10. On 0.10 lots it is about US$1.
Profit or loss ≈ pips moved × pip value per lot × lots. Example: EUR/USD rises 30 pips while you hold 0.5 lots long: 30 × US$10 × 0.5 = US$150.
Major, minor and exotic pairs
- Majors pair the US dollar with another large currency (EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, NZD/USD). They are the most liquid and usually have the tightest spreads.
- Minors or crosses do not include the US dollar (EUR/GBP, EUR/JPY, GBP/JPY).
- Exotics pair a major with an emerging-market currency. They usually cost more to trade and can move sharply.
What moves prices
Expectations about interest rates and central bank decisions are usually the biggest driver, followed by inflation and jobs data, economic growth, market risk sentiment and geopolitical events. Data releases can move prices in seconds, and spreads often widen around them.
Trading sessions
Trading follows the sun through Sydney, Tokyo, London and New York. Liquidity is usually highest when London and New York overlap, which is often when spreads are tightest.
Key takeaway
Trading forex means speculating on the price of one currency against another, usually with leverage, so gains and losses are both magnified. Learn these terms on a demo account before you use real money.
General information for education only, not financial advice. Trading forex and CFDs carries a high risk of loss. Read the disclaimer.