The foreign exchange market, or forex, is where currencies are traded. It’s the largest financial market in the world, with trillions of dollars changing hands every day. Think of it as a massive, decentralized network connecting banks, corporations, governments, and individuals who need to exchange one currency for another.

Why does it exist? Its primary purpose is to facilitate international trade and investment. If a European company wants to buy goods from Japan, it needs to convert its euros (EUR) into Japanese yen (JPY). If an American tourist wants to visit London, they need to exchange U.S. dollars (USD) for British pounds (GBP). This constant exchange is what drives the forex market.

Unlike a stock market, there's no central location for forex trading. It all happens electronically, over the counter (OTC), meaning transactions occur directly between parties through a network of banks and brokers. This global market operates 24 hours a day, five days a week, starting in Sydney, moving to Tokyo, then London, and finally New York.

In forex, currencies are always traded in pairs. When you make a trade, you are simultaneously buying one currency and selling another. This is because the value of a currency is always expressed in relation to another currency. For example, you might see a quote for EUR/USD.

This notation has a specific structure. The first currency listed (EUR) is the base currency, and the second (USD) is the quote currency.

If the EUR/USD price is 1.0800, it means one euro is worth 1.08 U.S. dollars. When you buy this pair, you are buying euros and selling dollars. If you sell it, you are selling euros and buying dollars.

The most traded pairs are called the "majors." They all involve the U.S. dollar and are known for their high liquidity, meaning you can easily buy or sell them.

When you look at a currency pair, you'll see two prices, not one. These are the bid and ask prices.

The ask price is always slightly higher than the bid price. The difference between these two prices is called the spread, and it’s how brokers make their money. For example, a quote for EUR/USD might look like this: 1.0800 / 1.0802. Here, the bid is 1.0800 and the ask is 1.0802.

Price movements in forex are measured in tiny increments called pips.

For most major currency pairs, a pip is the fourth decimal place ($0.0001$). If you bought EUR/USD at 1.0800 and the price rose to 1.0850, the pair has moved up by 50 pips. This small unit is the basis for calculating profit and loss in forex trading. For pairs involving the Japanese yen, like USD/JPY, a pip is the second decimal place ($0.01$).