FOREX stands for Foreign Exchange. Unlike stocks and commodities markets, foreign exchange is completely decentralized. There are no formal exchanges where transactions take place. Practically all forex trading is “over-the-counter” and transactions are done over the phone, with a broker, or by electronic means. Therefore, forex is rather a general term combining all worldwide financial institutions and organizations of all calibers into a single market place.
Just think about it. Every time two people or businesses located in different countries make a transaction, they have to exchange their local currency into the currency of another country. Now imagine how many such transactions take places each and every day around the world. Add to that huge volumes of currencies exchanged for speculation and investments by banks and other financial institutions and you will see why this is the biggest market of all.
For an average person, the most practical way to trade forex is via an online broker. Brokers pair all buy and sell orders and re-sell or hedge the remaining part to other brokers and/or financial institutions. The prices quoted by the broker are usually aggregated from multiple sources and might differ very slightly from one broker to another.
All currencies are traded in pairs. Each pair’s name is an abbreviation of the names of its currencies. Some of the pairs were given nicknames by traders. There are many different pairs but the main trading activity is concentrated in the following:
EUR/USD – Euro versus US dollar or the number of US dollars for one Euro (euro, fiber)
GBP/USD – British Pound versus US dollar or the number of US dollars for one British pound
sterling (pound, sterling, cable)
sterling (pound, sterling, cable)
USD/JPY – US dollar versus Japanese yen or the number of Japanese yen for one US dollar (yen,
dollar-yen, ninja)
dollar-yen, ninja)
USD/CHF – US dollar versus Swiss franc or the number of Swiss francs for one US dollar (swissie,
dollar-franc). CHF stands for Confederation Helvetia franc.
USD/CAD – US dollar versus Canadian dollar or the number of Canadian dollars for one US dollar
(Loonie, Canuck)
dollar-franc). CHF stands for Confederation Helvetia franc.
USD/CAD – US dollar versus Canadian dollar or the number of Canadian dollars for one US dollar
(Loonie, Canuck)
AUD/USD – Australian dollar versus US dollar or the number of US dollars for one Australian dollar
(Oz or Aussie)
NZD/USD – New Zealand dollar versus US dollar or the number of US dollars for one New Zealand
dollar (kiwi)
(Oz or Aussie)
NZD/USD – New Zealand dollar versus US dollar or the number of US dollars for one New Zealand
dollar (kiwi)
There are also pairs called crosses such as:
EUR/JPY – Euro versus Japanese yen or the number of Japanese yen for one euro (yuppi)
EUR/GBP – Euro versus British pound or the number of British pounds sterling for one euro (euro-
pound, euro-sterling)
pound, euro-sterling)
EUR/CHF – Euro versus Swiss franc or the number of Swiss francs for one euro (euro-swissie)
The list goes on.
The price of the pair states how much the first currency is worth in the second currency denomination. For example, if the price for EUR/USD is 1.3500, this means that one Euro is currently worth $1.35.
You are always long or short one side of the pair against the other side of that pair. When you buy the EUR/USD pair this means that you simultaneously buy the Euro and sell the USD. When you short the Euro, you basically sell the Euro and buy the USD.
All currency pairs in retail forex are traded in lots. Each standard lot is worth $100,000 USD of whatever currency is being traded. Therefore, when trading the Canadian dollar, the Euro, or any other currency, you would be trading $100,000 USD worth of that currency. The actual amount of that currency will depend on its current price in USD.
There are also mini and micro lots, which are one tenth and one hundredth of the size of the regular lot respectively.