What is forex and how does it work?

What is forex trading?

Forex trading, also known as foreign exchange or FX trading, is the conversion of one currency into another. FX is one of the most actively traded markets in the world, with individuals, companies and banks carrying out around $6.6 trillion worth of forex transactions every single day.

While a lot of foreign exchange is done for practical purposes, the vast majority of currency conversion is undertaken by forex traders to earn a profit. The amount of currency converted every day can make price movements of some currencies extremely volatile – which is something to be aware of before you start forex trading.

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What is a forex pair?

A forex pair is a combination of two currencies that are traded against each other. There are hundreds of different combinations to choose from, but some of the most popular include the euro against the US dollar (EUR/USD), the US dollar against the Japanese yen (USD/JPY) and the British pound against the US dollar (GBP/USD).

Forex trading is always with a currency pair.

What are the base and quote currencies?

The base currency is always on the left of a currency pair, and the quote is always on the right. The base currency is always equal to one, and the quote currency is equal to the current quote price of the pair – which shows how many of the quote currency it’ll cost to buy one of the base. So, when you’re trading currency, you’re always selling one to buy another.

FX pairs include a base and a quote currency.

What is a pip in forex?

A pip in forex is usually a one-digit movement in the fourth decimal place of a currency pair. So, if GBP/USD moves from $1.35361 to $1.35371, then it has moved a single pip. But, if you’re trading JPY crosses, a pip is a change at the second decimal place. A price movement at the fifth decimal place in forex trading is known as a pipette.

A pip in FX trading is a one-digit movement in the fourth decimal place of the pair.