What is Forex (Currency) Trading?

Introduction
Foreign Exchange trading (also called Forex, FX, or currency trading) describes trading in the many currencies of the world. It is the largest and least regulated market providing the greatest liquidity to investors. Daily volume in the currency markets is around $1.5 trillion. By comparison, the NYSE daily volume averages $25 billion a day.
The spot Forex market is the most liquid. Spot, meaning that trades are settled within two banking days. There is no central exchange of physical location. Trading takes place over-the-counter, 24-hours a day directly between the two parties of a trade over the telephone and electronically.
Participants in Forex include central banks, corporations, individual investors and speculators, and hedge funds. With the advent of electronic trading platforms, self-directed investors and smaller financial firms now have access to the same liquidity as larger market participants.
Trading, or speculation, makes up 95% of the daily volume. The other 5% of daily volume consists of governments and commercial companies converting one currency into another from buying and selling goods and services.
Forex Trading
When trading currencies, the trade is always done in pairs – currency Pair. One currency is bought and the other sold. For example, you buy Euros with Dollars, anticipating, the Euro to increase in value relative to the Dollar. If the Euro rises relative to the Dollar, you sell the position and have made a profit.
Most Commonly Traded Currencies (the “Majors”):
US Dollar (USD)Japanese Yen (JPY)Euro (EUR)British Pound (GBP)Canadian Dollar (CAD)Australian Dollar (AUD)Swiss Franc (CHF)
Commonly Traded Currency Pairs:
US Dollar and the Japanese Yen (USD/JPY)Euro and US Dollar (EUR/USD)US Dollar and Swiss franc (USD/CHF)British Pound and US Dollar (GBP/USD)
When quoting currency pairs, the first currency is referred to as the base currency and the second, the counter or quote currency. The base currency is always equal to 1 monetary unit of exchange, for example, 1 Dollar, 1 Pound, 1 Euro. The dominant base currencies are, in order of frequency, the EUR, GBP, and USD. When a currency is quoted against the US Dollar it is called a direct rate. Any currency not against the US Dollar is referred to as a cross rate.