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Lesson 1. What is Forex?
The foreign exchange market, or forex for short, is the largest financial market in the world. With daily trading volumes exceeding $7.5 trillion, it dwarfs all other financial markets combined. Despite its size and importance, many people have a limited understanding of what forex trading actually involves, how it works, and why it matters to the global economy.
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10 min read

This lesson provides a foundational understanding of the forex market—its purpose, structure, and unique characteristics. Whether you're exploring forex out of curiosity or considering it as a potential trading opportunity, understanding these basics will help you navigate the more complex aspects covered in later lessons.

The Essence of Forex

At its core, forex is about exchanging one currency for another. When you travel abroad and exchange your domestic currency for foreign money, you're participating in the forex market on a small scale. However, the vast majority of forex transactions occur for commercial, investment, or speculative purposes.

Unlike stocks, which represent ownership in companies, or commodities that are physical goods, currencies are valued relative to one another. This creates a unique dynamic where every trade involves simultaneously buying one currency and selling another.

How does Forex differ from other markets? 

The forex market has several distinguishing characteristics that set it apart from other financial markets:

1. Decentralized Structure

Unlike stock exchanges like the New York Stock Exchange or NASDAQ, forex has no central marketplace or exchange. Instead, it operates as an over-the-counter (OTC) market where participants trade directly with one another through electronic networks. This decentralized structure means the forex market cannot "shut down" like a stock exchange might—it operates continuously throughout the trading week.

2. 24-Hour Trading

The forex market operates 24 hours a day, five days a week, following the sun around the globe. Trading begins each day in Sydney, then moves to Tokyo, London, and New York before starting again in Sydney for the next day. This continuous operation allows traders to respond to news and events as they happen, regardless of their time zone.

3. Exceptional Liquidity

Liquidity refers to how easily an asset can be bought or sold without affecting its price. With its enormous daily volume, the forex market offers unparalleled liquidity, especially for major currency pairs. This high liquidity typically results in lower transaction costs and the ability to enter or exit positions quickly.

4. Leverage Availability

Forex trading commonly offers higher leverage than other markets, allowing traders to control large positions with relatively small amounts of capital. While this can amplify profits, it also magnifies potential losses, making risk management essential.

5. No Commissions (Typically)

Most forex brokers make money through the spread—the difference between buying and selling prices—rather than charging commissions. This transparent cost structure helps traders calculate potential profits more accurately.*

*While it's true that many brokers make money from spreads, not all brokers are commission-free. Some brokers, especially those offering ECN (Electronic Communication Network) or STP (Straight-Through Processing) accounts, do charge commissions per trade. This nuance should be mentioned.

How currencies are quoted? 

Currencies are always quoted in pairs, representing the exchange rate between two currencies. For example, EUR/USD 1.1200 means that 1 euro can be exchanged for 1.12 U.S. dollars.

In each currency pair:

  • The first currency listed (EUR in EUR/USD) is called the base currency
  • The second currency (USD in EUR/USD) is called the quote or counter currency
  • The quoted price shows how much of the quote currency is needed to buy one unit of the base currency

Major Currency Pairs

The most actively traded currency pairs, known as the "majors," all involve the U.S. dollar paired with another major currency:

  • EUR/USD (Euro/U.S. Dollar)
  • USD/JPY (U.S. Dollar/Japanese Yen)
  • GBP/USD (British Pound/U.S. Dollar)
  • USD/CHF (U.S. Dollar/Swiss Franc)
  • AUD/USD (Australian Dollar/U.S. Dollar)
  • USD/CAD (U.S. Dollar/Canadian Dollar)
  • NZD/USD (New Zealand Dollar/U.S. Dollar)

These major pairs account for the majority of daily forex trading volume and typically offer the tightest spreads due to their high liquidity.

Key Takeaways

  1. Forex is the largest financial market in the world, with daily volumes exceeding $7.5 trillion
  2. Unlike stocks or commodities, forex trading always involves simultaneously buying one currency while selling another
  3. The forex market operates 24 hours a day, five days a week as an over-the-counter, decentralized market
  4. Major participants include banks, central banks, corporations, investment funds, and retail traders
  5. Understanding currency pairs, quotes, and the basic trading process provides the foundation for successful forex trading