In a nut shell it is the buying and selling of currencies.
The word Forex is actually an abbreviation for “Foreign exchange”. The Forex market is where all transactions involving the exchange of one currency for another take place.
This market is De-centralised which means there is no single exchange on which all trades and transaction takes place. Rather, all of the activity goes on via many exchanges which are all interlinked electronically. As a result, trading goes on around the clock, 24 hours per day, because there is always one part of the world that is up and trading.
Every single trade that takes place directly via this market is done electronically, and the prices of each currency are quoted to the market by Banks, and bought or sold by a whole variety of different entities including other banks, investment institutions and companies.
Because all trades are carried out electronically and nothing tangible is actually bought or sold it can get a little bit confusing to people who are new to it.
The best illustration I have seen is to imagine each currency is a share in the particular country and economy it relates to, so, For example if you buy US Dollars you are buying a small share in the USA and its economy. This is the case because the value of the currency is a direct reflection of how traders view that particular country and its economy at that particular time.
Currencies are traded in pairs through a broker and this makes sense when you think about it because you are trying to trade money.
When you imagine every other transaction that takes place in the world today there is always a pair of things traded at the same time, For example if you go into a shop and buy a Computer you trade your cash for the Computer, You can’t buy the exact same computer with another identical model because the value of both items is exactly equal, therefore any exchange is pointless!
So you have to use something else.
Trading currencies is exactly the same because if you wanted to buy one US Dollar you couldn’t use another US Dollar to do so, because the value is exactly the same.
Instead you would use another currency, Euros for example.
So to keep things really simple for us as traders the broker automatically places each currency into a pair.
The most common pairs are called the ‘major pairs’ and include the following: GBP/USD, EUR/USD, USD/CHF, USD/JPY, USD/CAD, AUD/USD, NZD/USD.
These pairs are made up from the 8 major world currencies:
Great British pound (GBP), United States Dollar (USD), Euro (EUR), Swiss Franc (CHF), Japanese Yen (JPY), Canadian Dollar (CAD), Australian Dollar (AUD) and New Zealand Dollar (NZD).