What Is Forex?
Forex — short for foreign exchange — is the global market where currencies are bought and sold. Every forex trade involves two currencies: you buy one while simultaneously selling another. These are quoted as pairs — EUR/USD, GBP/JPY, USD/CHF — with the first currency (base) measured against the second (quote).
If EUR/USD is trading at 1.0850, it means one euro costs 1.0850 US dollars. If you believe the euro will strengthen, you buy EUR/USD. If it rises to 1.0900, you profit from the 50-pip move.
Why Forex Is Popular
Forex has several characteristics that attract traders. It operates 24 hours a day, five days a week — from the Sydney open on Sunday evening through the New York close on Friday. Liquidity is deep, especially on major pairs, meaning tight spreads and fast execution. And because currencies are always priced in pairs, you can trade in any direction — there's no restriction on short selling.
The market is also accessible with relatively small amounts of capital because of leverage. This makes it a common starting point for new traders, though the risks of leverage apply fully.
Major, Minor, and Exotic Pairs
Majors all include the US dollar: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, NZD/USD. They have the tightest spreads and deepest liquidity.
Minors (or crosses) don't include the dollar: EUR/GBP, EUR/JPY, GBP/JPY. Spreads are slightly wider but liquidity is still good.
Exotics pair a major currency with a smaller economy's currency: USD/TRY, EUR/ZAR, GBP/SGD. Spreads are wider and price movements can be more volatile and unpredictable.
What Moves Currency Prices
Exchange rates are driven by a combination of factors: interest rate differentials between central banks, economic data (GDP, employment, inflation), political stability, trade balances, and market sentiment. Central bank decisions — particularly from the Federal Reserve, ECB, and Bank of England — are typically the single biggest catalysts for major currency moves.
Understanding these drivers is what separates informed forex traders from those who are simply guessing.
Key Takeaways
- Forex involves trading currency pairs — buying one while selling another
- The market operates 24/5 with deep liquidity on major pairs
- Major pairs have the tightest spreads; exotics are wider and more volatile
- Central bank policy and economic data are the primary price drivers
- Leverage makes forex accessible but also increases risk
