What is forex trading?

The world’s largest market

Forex (foreign exchange) is the global market for exchanging one currency for another. It runs 24 hours a day, five days a week, through a network of banks, brokers and institutions rather than a single central exchange.

Businesses use it to pay for imports, investors use it to buy foreign assets, and traders use it to speculate on changes in exchange rates. According to the Bank for International Settlements, trillions of dollars change hands in this market every day.

How a currency pair works

Currencies are always quoted in pairs, such as EUR/USD. The first currency is the base, the second is the quote. A price of 1.0850 means one euro costs 1.0850 US dollars.

Buying EUR/USD is a bet that the euro will strengthen against the dollar; selling is a bet that it will weaken. Every trade is a view on the relationship between two economies.

• Majors: the US dollar against another large economy’s currency — EUR/USD, GBP/USD, USD/JPY.
• Crosses: pairs without the US dollar, such as EUR/GBP or AUD/JPY.
• Exotics: a major currency against an emerging-market currency, usually with wider spreads and sharper moves.

What moves exchange rates

Interest-rate expectations are the biggest driver: capital tends to flow toward currencies where returns are expected to rise. Inflation data, employment reports, central bank decisions and overall risk sentiment all feed into those expectations.

That is why the economic calendar matters. A single data release can move a pair more in one minute than it moved all morning.