Forex is short for "Foreign Exchange," which is when money from one country is traded for money from another country, or when money from one country is bought with money from another country.
When someone trades in foreign currencies, he makes or loses money based on how the value of his investments goes up or down because of how the currencies are moving. For example, an investor might buy German Mark if he thought the US dollar was weak. The real profit or loss for the investor could depend on how the Mark moves against the US$.
The Forex market is the largest financial market in the world. Every day, more than $1.5 trillion worth of trades happen there. Also, unlike other financial markets, the Forex market doesn't have a fixed location or a central exchange. Instead, trades happen "Over the Counter." It is run by a network of large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions that are connected by an electronic network. Retail traders are people who only do a small amount of business in this market. They take part indirectly by using brokers or banks.
The foreign exchange market is unique because of how much it trades, how liquid it is, how many and what kinds of traders are on it, how spread out it is geographically, how long it is open (24 hours a day), and how many things affect exchange rates.
Different currencies are traded for each other. Traditionally, each pair of currencies is written as XXX/YYY, where YYY is the three-letter ISO 4217 international code for the currency in which the price of one unit of XXX currency is written. EUR/USD, for example, is the price of the euro in US dollars, like 1 euro = 1.2045 dollars.
Ten of the biggest international banks do 73 percent of the forex trading. The "bid or buy" and "ask or sell" prices are always given to the market by these big banks. The "spread" is the difference between the price a bank or broker will sell at and the price a broker will buy from a wholesale customer. This spread is usually only 1-3 pips for pairs of currencies that trade a lot. In forex trading, one pip is the smallest price change that can be made. For example, if the exchange rate for the currency pair EUR/USD is 1.40000 and then changes to 1.4010, the pair moved 10 pips. No matter how the currency exchange rate is shown in fractions, the pip is the smallest unit. So, 1.3000 to 1.3010 is the same as 110.00 to 110.10 in terms of pips. For instance, the quote for EUR/USD could be 1.2200/1.2203. Most deals have a minimum size of $1,000,000 or more.
Whew! What a market!
