What is Forex?

First and foremost, Forex (Foreign Exchange Market) is the global market for buying and selling currencies. It is often referred to by its English acronym, FX, and is recognized as the largest and most liquid market in the world, moving more money compared to any other financial market.

Do you think this is the first time you’ve approached the foreign exchange market? If you’ve traveled abroad and had to exchange currency, then without realizing it, you’ve already made your first foreign exchange transactions. After reading this introduction, it won’t seem so strange to you when you went to exchange currency in Turkey and saw two prices, the buy and sell rates.


  • It is completely decentralized; that is, it does not have a central physical location for conducting transactions. Se opera en una red global de bancos y brokers.
  • The Forex market operates 24 hours a day, 5 days a week, excluding weekends, allowing for transactions at any time.
  • In terms of money volume, hasta 6 billones de $, Forex surpasses all other financial markets combined. To give an idea of its magnitude, in a single day, the movement of money in Forex can exceed what moves in a month on markets like Wall Street.

It’s a market with high liquidity, meaning there are many buyers and sellers.

Currencies are quoted in pairs. This means that while we are buying one currency, we are selling the other.

Currency Pair

In the EUR/USD example, on the left we have the Euro, which is the base currency, and on the right, the USD, which is the quote currency.

If the price is 1.38500, it means that 1 € is equivalent to 1.38500 $.

But in reality, there are always two prices. The sell price is 1.38504, and the buy price is 1.38494; the difference between these two prices is the Spread.

  • You buy this pair if you think that the Euro (base currency) will strengthen against the Dollar (quote currency). This is known as going long.
  • You sell this pair if you believe that the Euro (base currency) will weaken against the Dollar (quote currency). This is known as going short.

Forex trading operates on the principle of trading currency pairs, for instance, EUR/USD, as we’ve previously noted. This method exists because you can’t speculate on a currency in isolation; its value is intrinsically linked to another currency’s performance.

So, what’s the story behind the EUR/USD formatting?

Each currency on the Forex platform is assigned a three-letter code, following the ISO 4217 currency code standard.

Generally, the code begins with two letters that signify the country, followed by one representing the currency itself.

USD = United States Dollar. Nicknames for Forex Currency Pairs Diving into the world of currency trading, you’ll discover that pairs often carry nicknames, some of which include:

  • GBP/USD – “Cable”
  • EUR/CHF – “Swissy”
  • EUR/USD – “Fiber”
  • EUR/GBP – “Chunnel”
  • NZD/USD – “Kiwi”

Classifying Currency Pairs There are three primary classifications for currency pairs: major, minor, and exotic pairs.

Major Pairs

Major pairs are the heavyweights of the Forex market, making up about 85% of all trading volume. They feature currencies from the world’s largest economies.

For instance, transactions involving EUR/USD make up more than a quarter of Forex trades. Other significant pairs are:

  • EUR/USD – Euro vs. United States Dollar
  • USD/JPY – United States Dollar vs. Japanese Yen
  • GBP/USD – British Pound Sterling vs. United States Dollar
  • AUD/USD – Australian Dollar vs. United States Dollar
  • USD/CHF – United States Dollar vs. Swiss Franc
  • USD/CAD – United States Dollar vs. Canadian Dollar

Minor Pairs

Minors are pairs that exclude the United States Dollar, often referred to as cross-currency pairs.

They include:

  • EUR/GBP – Euro vs. British Pound Sterling
  • EUR/CHF – Euro vs. Swiss Franc
  • GBP/AUD – British Pound Sterling vs. Australian Dollar
  • GBP/JPY – British Pound Sterling vs. Japanese Yen
  • CAD/JPY – Canadian Dollar vs. Japanese Yen
  • CHF/JPY – Swiss Franc vs. Japanese Yen
  • EUR/NZD – Euro vs. New Zealand Dollar

These pairs are less frequently traded than their major counterparts, leading to less market liquidity and wider spreads.

Exotic Pairs

Exotic pairs involve one major currency and another less commonly traded, such as the United States Dollar against the Brazilian Real (USD/BRL).

These less common currencies are often from emerging markets or smaller countries with robust economies but come with the widest spreads due to their rarity in trades.

Examples include:

  • USD/MXN – United States Dollar vs. Mexican Peso
  • USD/THB – United States Dollar vs. Thai Baht
  • GBP/PLN – British Pound Sterling vs. Polish Zloty

Exotic pairs cater to the seasoned trader, presenting higher risks—and potentially higher rewards—due to the economic and political uncertainties of the nations involved.

What influences currency prices?

Interest rates, inflation, government policies, employment, demand for exports and imports. Additionally, the large number of traders and the amount of money being invested also play a role. All these factors cause prices to move very quickly, making this market highly volatile.

Thus, we have a market where many people can follow and make predictions about currency prices since general news allows us to form our own predictions. This contrasts with the stock market, where we need to be informed about a specific sector or even know how to read the financial statements of the company we want to invest in.

What’s the purpose of investing in Forex?

Investing in Forex is done for two main reasons. The first is to speculate, and the second is for hedging. The truth is that the vast majority of people invest to speculate on the price of currencies.

  • Hedging: This is about reducing our exposure to risk. If we import products from the United States, and the price of the dollar rises, we’re in trouble because we will have to pay more for the products we’re importing. To counter this, we can buy a contract that makes money if the Euro rises. This way, we make money in both scenarios.
  • Trading: This is the common way to invest in Forex, where traders invest based on their prediction of whether that currency will rise or fall.

Words You’ll Hear Everywhere


A pip represents the smallest possible change in the value of a currency pair in the Forex market. For instance, if the EUR/USD pair moves from 1.1000 to 1.1001, it has experienced a change of one pip.


Understanding this is crucial. To simplify, let’s consider two perspectives: that of an external broker (not us) and our own.

First, you should know that any asset has two prices: ASK and BID. Now, let’s look at it from two points of view.


  • ASK = the price at which THEY SELL THAT ASSET
  • BID = the price at which THEY BUY THAT ASSET

ASK is always higher than BID. This makes sense when you think about it, as anyone always wants to sell at a higher price than what they buy for.


Same situation, but from a different perspective

  • ASK = the price at which WE WILL PAY (if we wanted to) THAT ASSET to the broker
  • BID = the price at which WE WILL SELL (if we wanted to) THAT ASSET to the broker

As you can see, these are two sides of the same coin.

With that said, my recommendation is to forget about the “our perspective” and always think of ASK and BID as if you were looking at a broker, since you will always see ASK and BID from this perspective.


It’s the difference between the ASK and the BID.

The smaller the spread, the more liquid (liquid = number of people willing to buy and sell) a market is. Imagine a scenario where there were only you and me in the market, and you offered to sell a guitar for 100€ while I was only willing to offer 60€. We would never reach an agreement because it’s just us in the market. The spread would be 40, which is huge.

Now, extrapolate this to a market with millions of people selling and wanting to buy guitars; the prices would be much closer together.

Abstracting from this idea, we can realize that the smaller the Spread, the more liquid the market is. That is, a greater number of people will want to buy and sell that asset.

To give you an idea, Forex is the most liquid market in the world, by far surpassing the stock market.

A typical spread can be half a PIP (remember PIPs? I explained them a few paragraphs above). For example, the ASK (the price at which it sells) might be 1.25156 and the BID (the price at which it buys) 1.25151.


This is one of the reasons why Forex is so popular: most brokers allow you to leverage. And what is leveraging? It means they let you operate with more money by only using a small portion of your own funds. This small portion you use as a guarantee is known as margin.

For example, if a broker offers you 20:1 leverage, it means you could operate with $20,000 by using only $1,000.

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