Forex
Forex (foreign exchange) is the trading of one currency against another in standardised pairs.
A pair is quoted as base/quote — EUR/USD, USD/JPY, GBP/CHF — where the price reflects how many units of the quote currency one unit of the base currency buys. Forex is the largest financial market by daily volume.
This page covers the mechanic; it is not trading advice.
How a forex quote works
EUR/USD at 1.0850 means one euro buys 1.0850 US dollars. Buying EUR/USD is buying euros and selling dollars simultaneously — the position profits if the euro strengthens against the dollar. The pair price is two-sided (bid and ask), and traders open positions at the ask and close them at the bid.
Forex trades over-the-counter through banks and brokers; there is no central exchange. The interbank market sets prices at the wholesale level; retail brokers quote prices derived from interbank with their own spread layered on top.
A forex trade end-to-end
A USD-account trader opens a long EUR/USD position of 1 standard lot at 1.0850 and closes at 1.0900, a 50-pip move:
Position size = 100,000 EUR. Entry rate = 1.0850 (ask). Exit rate = 1.0900 (bid — price moved 50 pips upward). Pip value = $10 per pip on a USD-quoted pair, 1 standard lot. Gross profit before costs = 50 × $10 = $500.
Costs on the round trip: spread at entry approximately 1.2 pips × $10 = $12. Spread at exit approximately 1.2 pips × $10 = $12. Round-trip spread cost = $24. Net profit before any swap = $500 − $24 = $476.
If the position was held overnight, swap applies. At a long EUR/USD swap of approximately −$10 per night, holding for two nights deducts another $20.
Final P&L = $476 − $20 = $456 if held two nights, $476 if closed same-day. The same trade in pips ignores the cost layer entirely. A 50-pip movement on EUR/USD is mathematically a positive trade; the costs determine whether the account changes by what the pip count suggests or by something materially less.
Related terms
Related articles
Common questions
What does it mean to be long or short a currency pair?
Long a pair means buying the base currency and selling the quote currency simultaneously. A long EUR/USD position is long EUR and short USD. The position profits when the base currency strengthens relative to the quote currency. Short a pair is the inverse: short the base, long the quote, profitable when the base weakens. Both directions are equally accessible in forex; there is no equivalent of borrowing to short as in equity markets — the bilateral nature of currency pairs means selling EUR/USD is the same mechanic as buying USD/EUR.
What are major and minor currency pairs?
Major pairs include the US dollar paired with one of the other heavyweight currencies: EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, NZD/USD. Minor or cross pairs combine non-USD majors: EUR/GBP, EUR/JPY, GBP/JPY, AUD/JPY. Exotic pairs combine a major with an emerging-market currency: USD/MXN, USD/ZAR, USD/TRY. Spread typically widens from majors through minors to exotics, reflecting interbank liquidity at each tier. ESMA leverage caps differ between major and non-major FX (1:30 versus 1:20).