Overview — What is Forex?

The foreign exchange market (Forex, FX) is the global marketplace for buying, selling, and exchanging currencies. Unlike stock exchanges, Forex is a decentralized, over-the-counter (OTC) market where participants trade currency pairs 24 hours a day during weekdays across different time zones.

Forex facilitates international trade and investment, enables currency conversion (for tourism, cross-border business, and settlements), and provides venues for speculation and hedging against currency risk.

How Forex Trading Works — Currency Pairs & Quotes

All Forex trading is done in pairs. When you trade Forex you are simultaneously buying one currency and selling another. The most common format is BASE/QUOTE (for example EUR/USD).

Bid / Ask: Prices are quoted as two numbers: the bid (price brokers will buy the base currency) and the ask (price brokers will sell the base currency). The difference between ask and bid is the spread.

Trading platforms show real-time quotes and allow you to place market or pending orders to enter the market.

Who Trades Forex?

Major participants include:

• Central banks & governments — implement monetary policy and manage reserves.
• Commercial banks & interbank market — provide liquidity; large banks trade in huge volumes.
• Broker-dealers & liquidity providers — connect retail traders to the market.
• Institutional investors & hedge funds — speculate or hedge currency exposure.
• Corporates & importers/exporters — hedge currency risk from international trade.
• Retail traders — individuals trading small-to-medium sizes via brokers.

Market Structure & Trading Sessions

Forex operates across major sessions: Sydney, Tokyo, London, and New York. Liquidity peaks during overlaps (e.g., London/New York). Because it’s OTC, trading never happens on a central exchange — trades are routed through networks of banks and brokers.

Trading hours (approx): Sunday 22:00 GMT — Friday 22:00 GMT (varies with daylight saving).

Liquidity, Price Formation & Spreads

Liquidity in Forex refers to how easily a currency pair can be bought or sold without impacting price significantly. Major pairs (EUR/USD, USD/JPY, GBP/USD) are very liquid. Exotic pairs are less liquid and usually have wider spreads.

Brokers may show fixed or variable spreads. Variable spreads widen during big news or low liquidity periods.

Concrete Examples — Reading Quotes & Calculations

1) Buying EUR/USD: If EUR/USD = 1.1018/1.1021 and you place a market buy order, you pay 1.1021 USD to buy one EUR. If the price later rises to 1.1050 and you close, your profit = (1.1050 − 1.1021) × size.

2) Pip and pip value (short example): For most pairs a pip is 0.0001. If you trade 10,000 units (0.1 lot) of EUR/USD, pip value ≈ $1 per pip (approximation depends on pair & account currency).

Quick pip value rule:
0.01 lot (1,000 units) ≈ $0.10 per pip
0.1 lot  (10,000 units) ≈ $1.00 per pip
1.0 lot  (100,000 units) ≈ $10.00 per pip
(Values in USD when quote currency = USD)

Execution, Brokers & Leverage

Brokers provide access to the Forex market through platforms (MT4/MT5, web, mobile). Orders are either instant-execution or market depending on the broker model. Prices come from liquidity providers.

Leverage allows you to control larger positions with a small deposit (margin). Leverage magnifies gains and losses — use responsibly and understand margin requirements.

Risks & Risk Management

Forex carries multiple risk types: market risk (price moves), leverage risk (amplified losses), counterparty risk (broker solvency), and operational risk (technical failures). Effective risk management includes using stop losses, limiting leverage, diversifying, and position sizing rules.

Stop loss:

An order to close a position at a predetermined loss level.

Take profit:

An order to close a position when a target profit is reached.

How to Get Started — Practical Steps

1. Learn the basics— currency pairs, quotes, pips, spreads, lots, and leverage.
2. Choose a regulated broker with transparent pricing and good execution.
3. Open a demo account and practice for several weeks until you understand order behavior and slippage.
4. Develop a trading plan with entry/exit rules, risk-per-trade, and position sizing.
5. Start small and scale only after consistent positive results and sound risk control.

Glossary — Key Terms

Base currency

The first currency in a pair (e.g., EUR in EUR/USD).

Quote currency

The second currency in a pair (e.g., USD in EUR/USD).

Pip

Smallest standard price movement (usually 0.0001 for most pairs).

Lot

Standardized trade size (standard = 100,000 units; mini = 10,000; micro = 1,000).

Spread

Difference between ask and bid.

Further Reading & Next Steps

Continue to the next lessons for detailed breakdowns of pips/lots/spreads, currency pair types, platform tutorials (MT4/MT5), order types, and risk management strategies.