What Is Forex?

Forex in one sentence

Forex, short for foreign exchange, is the market where one country's currency is exchanged for another's. Every international purchase, every cross-border payment, every central bank currency intervention takes place in the same underlying market. When a UK company pays a US supplier in dollars, it participates in the forex market. When a Japanese tourist exchanges yen for euros at a bureau de change, that too is a forex transaction.

The retail trader who opens a GBP/USD position on a trading platform is operating in this same market, though at a very different scale. The forex market is vast and largely institutional. Banks, corporations, and central banks account for the vast majority of daily volume. Retail traders are a small slice of total participation, but the market's depth and liquidity are what make it accessible to individuals at all.

Understanding forex begins not with charts or strategies, but with the simple question: what does it mean to buy one currency and sell another?

How a currency pair actually works

Every forex transaction involves two currencies. They are always quoted together as a pair, with a slash separating them. GBP/USD is the pound quoted against the US dollar. EUR/JPY is the euro quoted against the Japanese yen.

The currency on the left is called the base currency. It is the one being bought or sold. The currency on the right is the quote currency. It tells you how many units of the quote currency you need to buy one unit of the base.

Take GBP/USD at 1.2700. That price means one pound buys 1.27 US dollars. If you buy GBP/USD at 1.2700 and the price rises to 1.2850, each pound is now worth more dollars. You have made a gain. If the price falls to 1.2600, each pound buys fewer dollars. You have made a loss. The direction of the pair's movement, up or down, reflects the relative strength of the base currency against the quote currency at that moment.

The smallest standard unit of price movement in most pairs is a pip, short for "percentage in point". For GBP/USD, one pip is 0.0001. A move from 1.2700 to 1.2701 is one pip. Many brokers now quote prices to five decimal places, with the fifth decimal called a pipette.

Currency pairs are grouped into three broad categories based on their liquidity and the currencies involved.

For most UK retail traders starting out, major pairs are the natural focus. They are the most liquid, the most written about, and the cheapest to trade in terms of spread cost.

Who trades forex

The forex market has several distinct layers of participants, each operating at a different scale and for different reasons.

Central banks sit at the top. Institutions such as the Bank of England, the European Central Bank, and the US Federal Reserve participate in the forex market to manage monetary policy and, on occasion, to intervene directly in currency markets. A central bank statement or rate decision can move a currency pair significantly in seconds.

Below central banks are commercial banks and financial institutions. The bulk of daily forex volume passes through interbank transactions, where large banks trade with each other directly or through electronic matching systems. These institutions are not speculating; they are managing currency exposures on behalf of clients and their own books.

Corporations are the next layer. A UK company that sells products in the US receives payment in dollars, which it needs to convert to pounds. A European manufacturer importing materials from Japan faces the opposite exposure. Corporations participate in the forex market primarily to hedge currency risk, not to speculate.

Retail traders, including individual traders using platforms provided by FCA-regulated brokers, are the final layer. By number of participants, this is the largest group. By volume, it is a small fraction of the overall market. This matters for one practical reason: the retail trader is always a price-taker, not a price-maker. You trade at the prices the market offers, shaped by the activity of participants far larger than you.

Why forex trades 24 hours a day

The forex market has no central exchange and no single opening bell. It operates as a global over-the-counter market, with trading activity moving around the world as each regional financial centre opens and closes.

The trading week begins on Sunday evening when the Sydney session opens. Tokyo follows a couple of hours later, bringing activity to Asian currency pairs, particularly those involving the Japanese yen. The London session opens at 8am GMT and is the largest and most active of the four sessions. GBP pairs are most active during London hours, and the session sets the tone for much of the day's price action. New York opens at 1pm GMT while London is still active, creating the London-New York overlap between 1pm and 5pm GMT. This overlap typically sees the highest trading volume and volatility of the day, particularly in USD pairs.

The market closes on Friday evening when New York shuts. It does not trade over the weekend. Prices can gap between Friday's close and Sunday's open if significant news emerges while markets are closed, which is worth being aware of if you hold positions into the weekend.

What moves currency prices

Currency prices reflect the relative economic strength and monetary policy of the two countries in a pair. Several factors drive that assessment in practice.

Interest rate decisions are the most significant single driver. When a central bank raises interest rates, it makes assets denominated in that currency more attractive to international investors. Capital flows into the country to access higher returns, increasing demand for the currency and pushing its price up. When rates are cut, the reverse tends to follow. The Bank of England's rate decisions are closely watched by anyone trading GBP pairs. A hawkish statement, one signalling rate rises ahead, will typically strengthen the pound against most counterparts.

Inflation data matters because it influences what central banks do next. High inflation often leads to rate rises; persistent undershooting of inflation targets may lead to cuts. Employment figures, GDP growth data, and trade balance reports all feed into the same calculation: what does the economic picture tell us about where rates are headed?

Geopolitical events can also move currencies sharply and with little warning. Political uncertainty tends to weaken a currency because it introduces risk that investors price in by reducing their exposure.

How UK traders access the forex market

Retail traders in the UK do not access the interbank forex market directly. The minimum trade sizes and capital requirements for direct interbank participation are far beyond the reach of individual traders. Instead, UK retail traders access the forex market through FCA-regulated brokers offering either spread betting or contracts for difference (CFDs).

Spread betting on forex means speculating on price movements in pounds per pip, without owning any underlying currency. Under current UK tax rules, spread betting profits are generally exempt from capital gains tax and stamp duty, which makes it a tax-efficient vehicle for many retail traders.

A CFD, or contract for difference, is an agreement between you and the broker to exchange the difference in a currency pair's price between the point you open and the point you close the trade. CFDs are subject to capital gains tax on profits but losses can typically be offset against other gains. Both instruments involve leverage, which amplifies both gains and losses relative to the margin you deposit.

The choice between spread betting and CFDs is largely a tax question for UK traders. The trading experience on the platform is broadly similar. For more on how leverage works in practice, see our guide on what leverage is. For more on the CFD structure specifically, see what is a CFD.

The broker you use to access forex is the key practical decision. FCA authorisation, the spreads offered on the pairs you plan to trade, and the quality of the platform should all be part of that evaluation.