What Is Forex?
Changing money before a trip abroad is a forex trade. When the exchange rate moves, the same money buys a different amount of foreign currency.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
Key takeaways
- 1A forex trade = swapping one currency for another. The exchange rate decides how much you get.
- 2A rising rate means the first currency got more expensive. The same move means opposite things to the person buying and the person selling.
- 3Forex is an over-the-counter network of banks around the world with no single exchange. It runs almost 24 hours a day, Monday to Friday, as markets hand off to each other.
- 4Trading is busiest when the London and New York sessions overlap, and spreads are usually tighter then.
Check your understanding
Get every question right to complete this lesson
1.1 euro = 1.10 US dollars. How many dollars do you get for 1,000 euros?
2.EUR/USD moves from 1.10 to 1.20. What does that mean?
3.EUR/USD rises from 1.05 to 1.20. How many more dollars does €1,000 buy than before?
Text version · Forex Basics, lesson 1: “What Is Forex?”
Changing money before a trip abroad is a forex trade. When the exchange rate moves, the same money buys a different amount of foreign currency.
Changing money for a trip is a forex trade
forex (FX) = swapping one currency for another. An exchange rate of 1.10 means 1 euro buys 1.10 US dollars.
Why exchange rates change
An exchange rate is the price of a currency, set by supply and demand. When a country raises its interest rate or its economic data improves, more people want to hold its currency, and the currency rises.
A global relay, nearly 24 hours on weekdays
Forex has no central exchange; it's a network of banks around the world. Each region's trading session opens in turn, and it's busiest when London and New York overlap.
Key takeaways
- A forex trade = swapping one currency for another. The exchange rate decides how much you get.
- A rising rate means the first currency got more expensive. The same move means opposite things to the person buying and the person selling.
- Forex is an over-the-counter network of banks around the world with no single exchange. It runs almost 24 hours a day, Monday to Friday, as markets hand off to each other.
- Trading is busiest when the London and New York sessions overlap, and spreads are usually tighter then.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Keep the rate at 1.10 and click "Exchange €1,000": how many dollars do you get on the right?
- Click 1.20: how many more dollars does "vs. last month" show? Does that mean the euro got more or less expensive?
- Switch to "Coming home $→€" and click 1.20: does $1,000 get you more or fewer euros than last month?
- Pause the timeline at the bottom and drag to 22:00 Beijing time: which two markets does the session bar show open at the same time?
Quiz and explanations
- 1. 1 euro = 1.10 US dollars. How many dollars do you get for 1,000 euros?
- Answer: $1,100.1,000 × 1.10 = $1,100.
- 2. EUR/USD moves from 1.10 to 1.20. What does that mean?
- Answer: The euro got more expensive.1 euro now buys more dollars: the euro rose and the dollar fell relative to it.
- 3. EUR/USD rises from 1.05 to 1.20. How many more dollars does €1,000 buy than before?
- Answer: $150.1,000 × 1.20 − 1,000 × 1.05 = $1,200 − $1,050 = $150.
Terms in this lesson
- exchange rate (Exchange Rate): How much of one currency you get for one unit of another.
- forex (FX) (Forex / FX): Exchanging and trading the currencies of different countries.
- trading session (Trading Session): The business hours of financial centers like Sydney, Tokyo, London and New York; trading is busiest and spreads tighter when sessions overlap.
- interest rate (Interest Rate): The price of borrowing money, usually shown as an annual percentage.
- supply and demand (Supply & Demand): The balance between people who want to buy (demand) and people who want to sell (supply), which decides where the price goes.