Forex what is it
Family I · Instruments
Not to be confused with xauusd what is it.
Forex is the market for exchanging one national currency for another. It is an over-the-counter market, meaning trades are executed through a decentralised network of banks, brokers and electronic platforms rather than on a single central exchange. The instruments traded are currency pairs, such as EUR/USD or USD/JPY, and the price of a pair is the rate at which one unit of the base currency can be exchanged for the quote currency.
What is actually traded
A forex trade is always a simultaneous purchase of one currency and sale of another. The pair notation shows this: in EUR/USD, the euro is the base currency and the US dollar is the quote currency. A quoted price of 1.0850 means one euro exchanges for 1.0850 US dollars.
Because there is no central exchange, there is no single official price. Quotes come from a network of liquidity providers, and the best available bid and ask can differ slightly between venues. Most retail participation occurs through brokers that route orders to banks or other liquidity providers, and the terms of that access vary by broker and jurisdiction.
Contract sizes and leverage
Currency amounts are traded in standardised sizes. A standard lot is 100,000 units of the base currency, a mini lot is 10,000, a micro lot is 1,000 and a nano lot is 100. The size available to a retail account depends on the broker.
Leverage is expressed as a ratio, such as 30:1 or 100:1, and allows a position larger than the deposited margin. The maximum ratio offered to retail clients is set by the regulator in the client's jurisdiction and therefore varies by country. Leverage magnifies both gains and losses on the full position size.
Worked example: a long EUR/USD position
The same arithmetic applies in reverse to a short position. Spread, commission and any swap or rollover charge are deducted from or added to this gross figure, and those costs vary by broker and account type.
Sessions and participants
Forex trades continuously from the opening in Sydney on Monday morning to the close in New York on Friday evening. Activity concentrates in the overlapping hours of the London and New York sessions, when liquidity is deepest and spreads are typically narrowest.
Participants include central banks, commercial and investment banks, corporations hedging receivables and payables, fund managers, and retail traders. The relative importance of each group differs by pair: major pairs such as EUR/USD and USD/JPY attract the most institutional flow, while thinner pairs can be more sensitive to smaller orders.
Often confused with
- xauusd what is it
- Forex covers pairs of national currencies, while XAU/USD is a commodity quote pairing gold against the US dollar; the visible sign is the ticker, which contains XAU rather than two currency codes.