What is forex?

Foreign exchange trading—also commonly called forex trading or FX—is the global market for exchanging foreign currencies. Forex is the largest market in the world, and the trades that happen in it affect everything from the price of clothing imported from China to the amount you pay for a margarita while vacationing in Mexico.

At its simplest, forex trading is similar to the currency exchange you may do while traveling abroad: A trader buys one currency and sells another, and the exchange rate constantly fluctuates based on supply and demand.

Currencies are traded in the foreign exchange market, a global marketplace that’s open 24 hours a day Monday through Friday. All forex trading is conducted over the counter (OTC), meaning there’s no physical exchange (as there is for stocks) and a global network of banks and other financial institutions oversee the market (instead of a central exchange, like the New York Stock Exchange).

How Currencies Are Traded

All currencies are assigned a three-letter code much like a stock’s ticker symbol. While there are more than 170 currencies worldwide, the U.S. dollar is involved in a vast majority of forex trading, so it’s especially helpful to know its code: USD. The second most popular currency in the forex market is the euro, the currency accepted in 19 countries in the European Union (code: EUR).

Other major currencies, in order of popularity, are: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF) and the New Zealand dollar (NZD).

. All forex trading is expressed as a combination of the two currencies being exchanged. The following seven currency pairs—what are known as the majors—account for about 75% of trading in the forex market: