Forex is short for foreign exchange. It’s the global marketplace where currencies are bought and sold. Think about the last time you traveled to another country. You probably exchanged your home currency for the local one. That’s a foreign exchange transaction.

The forex market is like that, but on an enormous, global scale. It's the largest and most active financial market in the world, with trillions of dollars traded every day. Unlike the New York Stock Exchange, forex has no central location or physical building. Instead, it’s a decentralized, over-the-counter (OTC) market. Trades happen electronically between a global network of banks, financial institutions, and individual traders, 24 hours a day, five days a week.

The main players in the forex market are major financial institutions. Central banks, like the U.S. Federal Reserve, manage their country's currency supply. Large commercial and investment banks trade massive volumes for themselves and their clients, which include international corporations that need to exchange currencies for global business.

Then there are retail traders—individuals like you who speculate on the movement of exchange rates. The goal is to profit from the constant fluctuations in currency values. Because this market connects economies all over the world, it’s a direct reflection of global commerce and finance.

In forex, you never just buy or sell one currency. You always trade one currency for another. This is why currencies are quoted in pairs. For example, the most traded currency pair is the Euro and the U.S. dollar, written as EUR/USD.

The first currency in a pair (EUR) is called the base currency, and the second one (USD) is the quote currency. The exchange rate tells you how much of the quote currency you need to buy one unit of the base currency. If the EUR/USD exchange rate is 1.08, it means one Euro costs $1.08.

Let's say you believe the Euro will get stronger against the U.S. dollar. You would buy the EUR/USD pair. This is called going "long." If the exchange rate rises to 1.09, you could sell the pair and make a profit. On the other hand, if you thought the Euro would weaken, you would sell the EUR/USD pair, or go "short."

Here are some of the most commonly traded currency pairs, often called the "majors."

Now that you have a handle on the basics, let's test your knowledge.

Understanding these core concepts is the first step. They provide the foundation for everything else you'll learn about trading in the foreign exchange market.