Forex Fundamentals

Forex is the market for exchanging currencies. When a price moves, you are watching the relative value of two currencies shift against each other. Nobody quotes a single currency on its own, so everything is a pair.

Take EUR/USD. The first currency, the euro, is the base. The second, the US dollar, is the quote. If EUR/USD is 1.0850, it costs 1.0850 US dollars to buy one euro. If the price rises to 1.0860, the euro got slightly stronger against the dollar, or the dollar got slightly weaker against the euro. Same event, two ways to say it.

Forex is the largest financial market in the world by volume, and it runs around the clock from Monday to Friday. It is also a risky market, and most retail traders lose money, so the goal of learning the fundamentals is to understand what you are actually looking at before any money is involved.

Every pair has a base currency and a quote currency. Price always answers one question: how much of the quote currency does one unit of the base cost? In USD/JPY at 156.20, one US dollar costs 156.20 Japanese yen.

The "majors" are the most heavily traded pairs, and they all include the US dollar paired with another large economy's currency. The common majors are EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD. Majors tend to have the tightest spreads, which is the small gap between the buy and sell price, because so many people trade them.

"Minors", sometimes called crosses, are liquid pairs that do not include the US dollar, like EUR/GBP or EUR/JPY. They still trade plenty, just less than the majors, so spreads are usually a little wider. Pairs involving a smaller or emerging-market economy, like USD/TRY or USD/MXN, are called exotics and tend to move more sharply with wider spreads.

A pip is the standard unit of movement for most pairs. For pairs quoted to four decimal places, like EUR/USD, one pip is 0.0001. So a move from 1.0850 to 1.0851 is one pip, and a move from 1.0850 to 1.0900 is 50 pips.

Yen pairs are the main exception. Because USD/JPY is quoted to two decimal places, one pip there is 0.01. A move from 156.20 to 156.30 is 10 pips. Many brokers also show a fifth or third decimal, called a pipette, which is a tenth of a pip, so do not let the extra digit confuse you.

Pips matter because they are how you measure distance. If you plan a trade on EUR/USD where your stop loss, the price level where you exit to cap a loss, sits 30 pips away from your entry, then 30 pips is your risk on that trade. How much money that represents depends on your position size, which is a separate thing you choose deliberately rather than guess.

Forex trades 24 hours a day on weekdays because the market follows the business hours of major financial centres around the world. As one region winds down, another opens, so there is almost always somewhere active.

The four sessions people refer to are Sydney, Tokyo, London, and New York. In UTC, very roughly, Sydney runs about 22:00 to 07:00, Tokyo about 00:00 to 09:00, London about 08:00 to 16:00, and New York about 13:00 to 22:00. These shift by an hour when regions move on or off daylight saving, so treat them as approximate.

The busiest, most liquid window is the London and New York overlap, roughly 13:00 to 16:00 UTC, when two of the largest centres are open at once. A pair like GBP/USD often sees its sharpest movement then. Knowing the sessions helps you understand why a pair can sit quietly for hours and then move quickly once the right centres come online.

The first is mixing up the base and the quote. Always read the pair left to right: the price is the cost of one unit of the first currency, expressed in the second. Get this backwards and you will misread every move.

The second is ignoring sessions. Trading a London-driven pair in the middle of the quiet Asian hours can mean wider spreads and slower, choppier movement. It is not wrong, but you should know the conditions you are trading in.

The third is treating pips as money. A pip is a distance, not a dollar amount. The same 20-pip move can be a small or large sum depending on your position size, so always think in terms of risk first. These habits of reading pairs correctly, respecting timing, and thinking in risk transfer to other markets too, but here the focus is forex.