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According to the Bank for International Settlements, forex markets are more highly traded than any other, with trillions of dollars of currencies bought and sold each day. In this page, we’ll cover how you can find out what makes it so popular first hand.

Get started below, or jump ahead to a section:

• How currency markets work
• How to start trading forex
• Forex pair categories
• What moves forex markets
• Forex FAQs

How do currency markets work?

Currency markets work via a global network of banks, business and individuals that are constantly buying and selling currencies with one another. Unlike most financial assets – such as shares or commodities – the foreign exchange market has no physical location and trades 24 hours a day.

This is called an over-the-counter market, and it means that currency prices are constantly fluctuating in value against each other, potentially offering a greater number of trading opportunities.

There are four main forex trading hubs: London, Tokyo, New York and Sydney. When trading stops in one, it starts in another.

However, forex is also traded across Zurich, Frankfurt, Hong Kong, Singapore and Paris.

At City Index, you can speculate on the future direction of currencies, taking either a long (buy) or short (sell) position depending on whether you think a forex pair’s value will go up or down. The below video shows you how to trade the EUR/USD currency pair via a CFD.

Forex trading examples

For more information on how forex trading works, look through our list of forex trading examples.

To start trading forex, you’ll need to get to know a few key concepts and terms. Let’s take a look at each in turn.

Base currencies and quote currencies

You'll always trade forex in pairs. That means when you buy one currency, you do so by selling another. And when you sell one currency, you do so by buying another.

When you buy EUR/USD, for example, you're buying the euro while selling the US dollar. 

The two currencies in a pair are known as the base and the quote.

• The base is the first currency. In EUR/USD, it is the euro
• The quote is the second currency. In EUR/USD, it is the dollar

A forex pair tells you how much of the quote currency you'll need to exchange for a single unit of the base. If EUR/USD is trading at 1.1810, then you'll need to sell 1.1810 USD to buy a single euro.

Forex traders look to take advantage of changes in the relative value of the base and quote currency in a pair. You could, for instance, buy euros for dollars when EUR/USD is at 1.1810. If the euro strengthens against the US dollar, then your euros will be worth more dollars – so can sell euros for dollars and keep the difference as profit.

If EUR/USD had dropped in price, though, you might have to sell your euros for less than you bought them. In this case, you would make a loss.

For more information on pairs, take a look at our What is forex trading? page.

Pips, lots and margin

Pips measure how much a forex pair has moved. A single pip is equivalent to a one-digit move in the fourth number after the decimal point. If EUR/USD moves from 1.1810 to 1.1817, it has gone up seven pips.

One key exception to this rule is when the Japanese yen is the quote currency. In this case, a pip is calculated as a one-digit move in the second number after the decimal point. If USD/JPY moves from 110.05 to 110.01, it has fallen four pips.

As you may have noticed, even a 50-pip move won't earn you much if you trade 100 or 500 units of currency. That’s why most FX traders buy and sell forex in lots – batches of currencies that enable you to take advantage of even relatively small price moves.

A standard lot is equivalent to trading 100,000 units of currency. Buying one lot of EUR/USD means purchasing 100,000 euros for their value in US dollars. When CFD trading on forex, buying a single CFD is equivalent to trading one lot.

To avoid having to tie up all their capital when opening one position, most forex traders use leverage. With leverage, you only have to put up a fraction of your position's full value to open a trade. The amount you are required to put up is known as your margin.

Find out more about forex leverage and margin.

How to start trading forex

1. Choose a currency pair

The first step to opening a forex trade is to decide which currency pair you wish to trade. There are over 80 to choose from.

Forex pair categories

There are three main categories of forex pair: majors, minors (or major crosses) and exotics.

• Majors consist of the world’s biggest currencies against the US dollar, and make up around 85% of forex trading volume. The majors are EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD
• Minors are all the other combinations of the world’s biggest currencies, such as EUR/GBP and AUD/JPY. These are also often referred to as major cross pairs
• Exotics are pairs that include less-traded currencies, such as the Turkish lira (TRY) or Mexican peso (MXN)

Most new traders will pick one or two major pairs to focus on, often starting out with euro-dollar (EUR/USD). This is the world’s most traded currency pair, and typically has the tightest spreads.

2. Decide how you want to trade forex

There are two main ways to trade forex: derivatives such as Spread Betting and CFDs, or spot forex trading. They all enable you to go long and short on currency pairs, but they work in slightly different ways.