How the forex market works

The foreign-exchange market is where currencies are exchanged. It is decentralised and runs 24 hours a day from Monday to Friday, passing through the Sydney, Tokyo, London and New York sessions.

Pairs and quotes

Currencies are quoted in pairs, such as EUR/USD. The first is the base currency and the second the quote currency: a price of 1.0850 means one euro costs 1.0850 US dollars. Buying the pair means buying euros and selling dollars.

Pips, lots and pip value

• A pip is the standard unit of price movement — 0.0001 for most pairs, 0.01 for pairs quoted in Japanese yen.
• A standard lot is 100,000 units of the base currency; a mini lot is 10,000 and a micro lot 1,000.
• For EUR/USD, one pip on a standard lot is worth about 10 US dollars; on a micro lot about 0.10.

Costs of trading

• Spread — the gap between bid and ask prices. It widens in illiquid hours and around news.
• Commission — charged per lot on some account types.
• Swap — interest paid or received for holding a position overnight.
• Slippage — the difference between the expected and the executed price.

What moves currencies

Interest-rate decisions, inflation and employment data, growth figures, political events and risk sentiment all move exchange rates. Scheduled releases such as central-bank announcements can cause sharp moves and gaps — a known hazard for automated systems.