Foreign exchange trading is the simultaneous buying of one currency and selling of another. Examples of currency trading pairs are Euro/US Dollar (EUR/USD) and US Dollar/Japanese Yen (USD/JPY). Most currency transactions involve the "Majors" - US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

Unlike other financial markets, the foreign exchange market has no physical location and no central exchange. The Forex market operates 24 hours a day through an electronic network of banks, corporations and individual traders. Forex trading begins every day in Sydney, then moves to Tokyo, followed by London and then New York. The major market makers, or dealers, consist of the commercial and investment banks, the exchange traded futures, and registered futures commission merchants.

Foreign exchange markets and prices are mainly influenced by international trade flows and investment flows. The FX markets are also influenced, but to a lesser extent, by the same factors that influence the equity and bond markets: economic and political conditions especially interest rates, inflation, and political instability. Those factors usually have only a short-term impact, which makes Forex attractive as it offers some of the diversification necessary to protect against adverse movements in the equity and bond markets.

Foreign Exchange prices, or quotes, include a "Bid" and "Ask" similar to other financial products:

Bid: Price at which Dealer is willing to Buy and Traders can Sell Currency.

Ask: Price at which Dealer will Sell and Traders can Buy Currency.

The difference between the Bid and Ask is called the "Spread", which is the Trader's cost of the transaction.

Currencies are usually quoted to four decimal places, such as the Euro/US Dollar trading at 1.2400/1.2403, with the last decimal place referred to as a point or "pip". A pip for most currencies is 0.0001 of an exchange rate; the one exception is the USD/JPY quote in which each pip is equal to 0.01.

The symbol of each Forex contract is based on the two currencies. The currency on the left of the currency pair is always the base currency. Therefore, you always buy or sell the base currency against the other. For example, if you buy EUR/USD, you actually buy euro and sell the dollar for it. Vice versa, if you sell EUR/USD, you actually sell euro and purchase dollar in exchange of it. In the case of Euro vs. U.S. Dollar, let's assume the exchange rate is 1.3265⁸. It means in order to purchase 1 unit of euro, you will have to spend or sell 1.3265⁸ U.S. dollar for it. Vice versa, if I intend to sell 1 unit of euro, I need to purchase 1.3265⁸ units of U.S. dollar for it.

A contract defines the minimum amount of base currency to be purchased or sold. Usually, there are two commonly recognized terminologies: standard and mini.

A standard contract means each contract is comprised of 100,000 units of base currency. For example, 1 standard contract of EUR/USD means to buy or sell 100,000 euro worth of U.S. dollar.

A mini contract means each contract is comprised of 10,000 units of base currency. For example, 1 mini contract of EUR/USD means to buy or sell 10,000 euro worth of U.S. dollar.

Flexible contract usually means it's up to the clients to choose the trading amount. The contract size could be 10 units of base currency or 1,000,000 units of base currency.

Foreign exchange traders base their decisions on either technical analysis or fundamental analysis or a combination of both. Technical traders use charts, trend lines, support and resistance levels, mathematical models and other means to identify opportunities and drive trading decisions. Fundamental traders identify trading opportunities by analyzing economic information.

Trading in the currency markets requires a trader to think in a slightly different way about margin. Margin on the forex is not a down payment on a future purchase of equity but a deposit to the trader's account that will cover against any currency-trading losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 400:1 in some cases. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade.