Introduction to the Foreign Exchange Market

With daily volumes exceeding USD 5 trillion, the Foreign Exchange Market, or Forex, is the largest financial market in the world. It operates as a decentralized network where the world’s major currencies are traded against one another on a 24-hour basis, from Monday to Friday.

 

The Short History of the Modern Currency Market

 

After the end of World War II, the Bretton Woods Agreement (1944) laid the foundation for a new global monetary system. Under this agreement, a country’s currency was pegged to a specific quantity of gold. When the Bretton Woods system ended in the 1970s, it gave rise to the modern Floating Currency System. In this system, the value of each currency fluctuates based on supply and demand dynamics.

• In 1971, the CME (Chicago Mercantile Exchange) became the first exchange to offer currency trading through the International Monetary Market (IMM).
• Following 1990, advances in information technology paved the way for a fully computerized trading environment—today known as the Online Forex Market.

More: » World’s Exchange Rates History

 

Today, hundreds of online brokers provide access to the Foreign Exchange Market. These brokerage firms typically fall into three main categories:

(1) ECN Brokers (Non-Dealing Desk)

(2) STP Brokers (Non-Dealing Desk)

(3) Market Makers (Dealing Desk)

More: » Brokers for Forex Investors

 

The Interbank Market

The Interbank market is where large banks conduct currency transactions. It is also referred to as the Institutional Forex Market.

 

The Electronic Communication Network (ECN)

The Electronic Communication Network (ECN) is a decentralized system that automatically matches buy and sell orders in currency trading. ECNs allow investors in different geographic locations to execute transactions without the need for a third party. » Learn more about the ECN network

 

Most Traded Forex Currencies

The most traded currencies in the Forex market are the USD (United States Dollar), EUR (Euro), JPY (Japanese Yen), GBP (Pound Sterling), AUD (Australian Dollar), CHF (Swiss Franc), CAD (Canadian Dollar), and NZD (New Zealand Dollar).

 

Forex Market Participants

Participants in the Forex market include central banks, commercial banks (large and small), investment firms, retail and institutional traders, brokers, major importers/exporters, and even international tourists.

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Main Forex Trading Advantages

 

As already mentioned, Forex is a vast market—and large markets typically offer significant advantages to their participants:

(1) Forex trading can be conducted from anywhere in the world using a desktop or mobile device with an internet connection.

(2) High liquidity and strong competition result in low transaction costs.

(3) The availability of high capital leverage allows Forex traders to open positions by depositing only a small fraction of the total trade value.

(4) A wide range of innovative tools is available, specifically designed for the Forex market (e.g., automated platforms, FIX/API integrations, Expert Advisors, etc.).

 

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Key Factors Affecting the World's Exchange Rates

 

Many different events can cause significant fluctuations in the global currency market:

(1) Changes in central bank monetary policies, particularly regarding interest rates.

(2) Key macroeconomic releases, especially those related to inflation, unemployment, and economic growth. » Learn more on Forex fundamentals

(3) Political and strategic developments that may increase political risk.

(4) Business conditions and changes in government legislation, such as capital controls or regulatory shifts.

(5) Psychological factors and market expectations—for example, during periods of global financial uncertainty, the US Dollar typically strengthens.

 

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Basic Forex Trading Terms

 

• Bid/Ask Price

All Forex pairs are quoted with two prices: the bid and the ask price. The bid price is the price at which a Forex broker is willing to buy, so a trader can sell a currency at this price. The ask price is the price at which a Forex broker is willing to sell, allowing a trader to buy at that price.

• Trading Spread

Measured in pips, the spread is the difference between the bid and ask prices. For example, if the bid price is 1.1000 and the ask price is 1.1002, the spread is 2 pips. Narrow spreads mean lower transaction costs for Forex traders, which is especially important for intraday traders. Major pairs such as EUR/USD, GBP/USD, and USD/JPY typically have tighter spreads than other pairs.

• Pip

A pip is the smallest incremental price move of any Forex currency pair. For example, in the EUR/USD pair, a pip represents a movement from 1.1000 to 1.1001.

• Trading Leverage

In most financial markets, to execute a trade worth $1,000, you must deposit $1,000. In Forex, traders can open positions by depositing only a fraction of the trade’s total value, called the margin. The ratio between the margin and the full trade value is called leverage. The maximum leverage allowed for Forex trading in the European Union is 30:1.

• Standard Lot

For USD-based currency pairs, a standard lot is 100,000 units of currency. It is one of the three common lot sizes, along with mini and micro lots. Smaller lot sizes offer more flexibility in managing trades.

(1) Micro Lot (Best choice for beginners)

A micro lot is the smallest tradable size, equal to 1,000 units of currency. For USD accounts, a micro lot is worth $1,000 of the base currency. In this case, 1 pip equals 10 cents.

(2) Mini Lot (Best choice for average retail traders)

A mini lot equals 10,000 units of the account’s funding currency. For USD accounts, each pip is worth $1.

(3) Standard Lot (For professional traders)

A standard lot equals 100,000 units. In USD accounts, a standard lot is worth $100,000. The pip value for a standard lot is typically $10.

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Currency Quotation and Categories of Forex Pairs

 

Forex trading involves trading a pair of two different currencies. All currencies in the Forex market are traded against one another. For example, the Euro against the US Dollar forms the EURUSD currency pair. The first currency in any pair is called the Base Currency, and the second is the Quote Currency.

◙ In the EURUSD pair, the Euro is the Base Currency, and the US Dollar is the Quote Currency.

In any currency quote, the value of the base currency is always set to 1. For example, in EURUSD, 1 Euro is quoted in terms of how many US Dollars it is worth.

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Major Forex Currency Pairs

 

The major currency pairs (or "majors") are the most liquid and heavily traded in the Forex market, representing over 70% of all transactions. These pairs always include the US Dollar (USD) on one side and are paired with the world’s most stable and widely held currencies:

Currency Pair	Countries	Typical Market Spread (No commissions)	Forex Slang
EURUSD	Euro against the United States Dollar	1.0 pip	Euro-dollar
USDJPY	United States Dollar against the Japanese Yen	1.4 pip	Dollar-yen
GBPUSD	British Pound against the United States Dollar	1.5 pip	Cable
USDCAD	United States Dollar against the Canadian Dollar	2.0 pip	Loonie
USDCHF	United States Dollar against the Swiss Franc	2.0 pip	Swissy
AUDUSD	Australian Dollar against the United States Dollar	2.5 pip	Aussie
NZDUSD	New Zealand Dollar against the United States Dollar	2.7 pip	Kiwi

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Forex Crosses

 

Forex crosses (or "cross-currency pairs") are currency pairs that do not include the US Dollar (USD). Instead, they consist of two other major currencies traded directly against each other. While less liquid than major USD pairs, crosses play a vital role in Forex trading, offering unique opportunities for diversification and strategic positioning.

 

• Unlike majors (e.g., EUR/USD, USD/JPY), crosses bypass the USD entirely (e.g., EUR/GBP, AUD/JPY).
• Pricing is derived from their respective USD exchange rates (e.g., EUR/GBP = EUR/USD ÷ GBP/USD).

 

(1) European Currency (Euro) Crosses

Currency Pair	Forex Currencies	Typical Market Spread
EURCHF	Euro-Swiss Franc	2.4 pip
EURGBP	Euro-British Sterling	2.0 pip
EURCAD	Euro-Canadian Dollar	2.4 pip
EURAUD	Euro- Australian Dollar	2.8 pip
EURNZD	Euro-New Zealand Dollar	4.0 pip

 

(2) British Pound Crosses

Currency Pair	Forex Currencies	Typical Market Spread
GBPCHF	British Sterling-Swiss Franc	3.0 pip
GBPAUD	British Sterling- Australian Dollar	3.0 pip
GBPCAD	British Sterling-Canadian Dollar	4.0 pip
GBPNZD	British Sterling-New Zealand Dollar	6.5 pip

 

(3) Japanese Yen Crosses

Currency Pair	Forex Currencies	Typical Market Spread
EURJPY	Euro-Japanese Yen	1.8 pip
GBPJPY	British Sterling- Japanese Yen	3.0 pip
AUDJPY	Australian Dollar - Japanese Yen	2.4 pip
NZDJPY	New Zealand Dollar - Japanese Yen	2.6 pip
CADJPY	Canadian Dollar - Japanese Yen	2.6 pip
CHFJPY	Swiss Franc- Japanese Yen	2.5 pip

 

Exotic Forex Pairs

 

Exotic currencies are pairs that include the US Dollar or the Euro against the currency of a developing country. For example, the US Dollar against the Turkish Lira.

• Spreads on exotic pairs are generally much wider, making trading these pairs significantly more expensive than the major pairs mentioned earlier.

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Key Forex Trading Strategies

 

There are many different Forex trading strategies designed to suit various trading styles:

 

(1) Forex Scalping Strategies

Scalpers execute dozens of trades daily to profit from small fluctuations in exchange rates. They buy and sell currency pairs within minutes or even seconds.

» Forex Scalping Strategies

(2) Automated Forex Trading

Automated trading using Expert Advisors has become increasingly popular. This approach relies on specialized software scripts that run on trading platforms without human intervention.

» Creating custom Forex trading strategies

(3) Price Action Strategies

This strategy analyzes clean, indicator-free charts. Price action strategies focus on using the core price data of the Forex market.

» Price Action Strategies

(4) News-Trading Strategies

These strategies focus solely on news events, aiming to exploit market inefficiencies caused by recent developments in the currency market.

» Trading-the-News Strategies

(5) Swing-Trading Strategies

Swing trading targets short to medium-term timeframes, aiming to profit from strong price trends or price “swings.”

» Swing-Trading Strategies

(6) Carry-Trading Strategies

Carry trading is a popular Forex strategy that involves borrowing or selling a currency with a low interest rate while simultaneously buying a currency with a higher interest rate.

» Carry-Trading Strategies

» Key Forex Trading Strategies

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Choosing Forex Brokers

 

There are hundreds of Forex brokers offering online trading. Traders should select a broker based on the following criteria:

(1) Safety of funds

(2) Trading costs (ECN brokers typically offer the narrowest spreads and lowest commissions)

(3) Trading options (including funding methods, automated trading, available platforms, etc.)

(4) Technology (technological delays or inefficiencies can cause significant issues, especially for intraday traders)

 

Here is a list of regulated Forex Brokers: » More on Forex Brokers

 

■ Forex Trading Guide

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