Home / Course / Module 2 / What Is Forex? How the Currency Market Works
Module 2 · Lesson 1 of 7Forex (foreign exchange) is the market where one currency is swapped for another. This lesson explains how that market is organised, who takes part and where a retail trader fits in.
Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Educational content only. Nothing here is a recommendation, and no result is guaranteed.
Forex, short for foreign exchange (also written FX), is the global market in which currencies are exchanged for one another. Every time a UK company pays a supplier in euros, a tourist changes pounds into dollars, or a pension fund buys overseas shares, a currency exchange sits somewhere underneath.
Unlike a shop, there is no single price for a currency. The price of one currency in terms of another is called an exchange rate, and it changes constantly as buyers and sellers around the world act on new information.
The forex market is usually described as the largest financial market in the world by daily turnover, because so much international business needs currency conversion. You do not need an exact figure to understand why: trade, travel, investment and government finance all cross borders, and each crossing needs an exchange.
Currencies are always priced against each other. You cannot say the pound is 'worth' 1.30 on its own: it is worth 1.30 US dollars. Every forex price is a comparison.
Shares are mostly traded on an exchange, a central venue with one order book. Forex is different. It is an over the counter (OTC) market, meaning deals are made directly between two parties, usually through electronic networks run by banks and other dealers.
This is why forex is called decentralised. There is no single official price. Large banks quote prices to each other and to clients, and those quotes are very close to each other because anyone can compare them and trade with whoever offers the best deal.
A useful analogy is the market for second-hand cars online. No single lot holds every car, but thousands of sellers and buyers are connected, and prices stay broadly in line because everyone can see everyone else.
One practical result: the market is open around the clock on weekdays, because as one financial centre closes another opens. We look at that in Forex Sessions and Liquidity.
Currency deals come in three main flavours.
| Type | What it is | Who mainly uses it |
|---|---|---|
| Spot | Exchange at today's rate, with the actual currency normally settling about two business days later. | Banks, funds, companies, and the pricing behind most retail trading |
| Forward | An agreement today to exchange at a fixed rate on a set future date. | Companies that want to lock in a cost or income |
| FX swap | Two linked deals: exchange now, and reverse the exchange on a later date. | Banks and institutions managing funding and short-term currency needs |
The spot rate is the headline price you see on a chart. When people talk about 'the EURUSD price' they almost always mean the spot rate. Forwards and swaps matter to retail traders mainly because they explain overnight financing charges, covered in Swaps, Rollover and Carry.
Most participants are not trying to speculate. Many simply need currency to do something else.
Retail traders are a small part of total volume. That is worth remembering: you are not setting prices, you are reacting to a market dominated by much larger players, which is a good reason to stay humble about your edge.
A retail trader almost never exchanges physical currency. Instead they open a position with a broker, usually as a CFD (contract for difference), which is an agreement to settle the price difference in cash. You never receive the euros or dollars. You gain or lose the change in the exchange rate, multiplied by your position size.
'Buying' a pair means you expect the first currency to strengthen against the second. 'Selling' means the opposite. Because you are dealing in a contract, selling is as easy as buying, with no need to own anything first.
Suppose EURUSD is quoted at 1.1000, meaning 1 euro costs 1.10 US dollars. A trader buys 10,000 euros' worth (0.10 lot) through a broker.
The same size of move produces the same size of loss as gain. Nothing here is a prediction or a recommendation, only arithmetic.
Trading forex through leveraged CFDs can lose money quickly, and many retail accounts lose money. Never trade money you cannot afford to lose.
Gold's trading symbol XAUUSD is itself a currency-style quote: XAU is the code for one troy ounce of gold, USD is the dollar. Brokers often list it beside currency pairs, and it reacts strongly to the US dollar. That is one reason a gold trader benefits from understanding forex. See Gold Trading for Beginners for how XAUUSD works in practice.
In the next lesson, Currency Pairs Explained, we look at how to read a quote and tell the base currency from the quote currency.
No. Shares trade mainly on exchanges with one order book, while forex is decentralised and OTC. Forex is also priced as pairs, so every trade compares two currencies.
No. A grasp of how interest rates, inflation and growth affect currencies helps over time, and the lessons in this module build that gradually.
The Gold Desk shares XAUUSD signals on Telegram, with entry, stop loss and targets on every call. Signals are educational ideas, not advice, and no result is guaranteed. Not directed at residents of the USA. Join the free Telegram channel.