Forex, short for Foreign Exchange, is the worldwide inter-bank currency trading market.

Unlike the stock exchanges, there is no centralized Forex exchange. It exists entirely as a network of banking relationships between some of the world's largest banks (referred to as Tier 1 banks).

The Forex market's extremely high daily currency trading volume (turnover), led by London (UK) and New York (US), dwarfs even that of the New York Stock Exchange.

No currency is an island. As long as it remains possible to trade currencies against each other, every currency's price will only be measured in terms of its value against another currency. For example: There is no single universal price for the British Pound. However, you can easily find the price of a British Pound in terms of US Dollars (GBP/USD) or British Pounds in terms of Japanese Yen (GBP/JPY). Each of these (eg. GBP/USD) is called a Forex pair (or currency pair) because each currency is paired against another in order to determine its value. (Technically, you can determine the universal price of a currency using a weighted basket of these standard pairs, as in the US Dollar Index, but that's a different discussion for a different time.)

Forex quotes are essentially priced just like a public company's shares on a stock exchange. Since most people are familiar with the basic concept of stock trading, the simplest analogy would be to think of "GOOG" (Google's stock, as listed on the NASDAQ exchange in the United States) as "the price of GOOG as quoted in US Dollars" or, if it were quoted in the style of a Forex pair, "GOOG/USD". In other words, the quote for the "EUR/USD" (Euro vs US Dollars) pair is quite literally "the price of Euros as quoted in US Dollars".

Note on Forex Terminology: The currency on the left is referred to as the "base currency". The currency on the right is known as the "quote currency". Example: In EUR/USD, EUR is the base currency and USD is the quote currency.

For all intents and purposes, a pip is to a Forex pair what a cent is to shares traded on stock exchanges. It's the main point of movement tracked by Forex traders in terms of profit and loss. (And yes, this is still the case even if your broker quotes an extra digit or two after it. See the note on fractional pips below for more.)

One pip is always 1/100th (one hundredth), or two additional decimal places, of the lowest physical denomination of the quote currency (the currency on the right side).

Since most currencies have an equivalent to a cent or penny (ie. two decimal points is the lowest denomination of physical cash, with one cent/penny being .01 of a dollar), the pip value would be the 4th decimal (since two additional decimal places down or 0.0001 of a dollar.)

The only exception is the Japanese Yen (JPY) -- it has no cent/penny equivalent, one Yen is essentially one cent in its domestic use, so the pip value of a pair quoted in JPY is the 2nd decimal (since two additional decimal places makes 0.01 of a Yen).

Example 1:
If the price of EUR/USD (Euro vs US Dollar) is 1.3602, then the "2" is the current pip value (if it changes from 1.3602 to 1.3603, we say that it has gone up 1 pip). The USD, or US Dollars, is the quote currency (right side) in this case which has a lowest denomination of a cent (0.01 of a dollar) so the pip value at two additional decimal places is the fourth.

Example 2:
If USD/JPY (US Dollar vs Japanese Yen) is priced at 89.05, then the "5" is the pip value (if it changes from 89.05 to 89.06, we say that is has gone up 1 pip). The JPY is the quote currency (right side) in this case, and its lowest physical denomination in cash is one Yen, so the pip value at two additional decimal places is the second.

Fractional pips:
In recent years, many brokers are quoting an additional digit, resulting in a 5th decimal for most currency pairs (or a 3rd decimal in the case of JPY-quoted pairs.) These 5th/3rd decimals are commonly referred to as "fractional pips" since they are one digit past the pip value. The actual price movement on the market is still based around the actual pip values (4th for most/2nd for JPY-quoted pairs), so the fractional pip values are insignificant in terms of trading decisions. In most cases, they can be ignored altogether for the purpose of entry and exit decisions.

In the Forex market, one standard lot is 100,000 units of base currency (which is equal to 10 units of quote currency per pip).

For example, in the case of GBP/USD (British Pounds vs US Dollars), to buy one lot would be to buy 100,000 British Pounds. This results in a gain or loss of 10 units of quote currency ($10 US Dollars, in this case) for every 1 pip of price movement. Meaning, if you bought one lot of GBP/USD at 1.4206 and it dropped by 1 pip to 1.4205, you are sitting on an unrealized loss of 10 US Dollars.

One standard lot was traditionally the smallest amount of base currency that can be traded on the interbank Forex market, which was appropriate considering the majority of its participants deal in millions of dollars at a time with the Tier 1 banks. Obviously, the same volatility on the typical retail currency trader's account (which typically has a much smaller balance than a million) would result in an extremely dangerous risk profile.

Due to the expansion of the online Forex trading (retail) market in recent years, many retail currency brokers began to offer much smaller lot sizes which are generally referred to as:

Mini Lots (10,000 units or $1 per pip)
Micro Lots (1,000 units or $0.10 per pip)
Nano Lots (100 units or $0.01 per pip)
A few brokers even offer single units as the denominator of trade size.

In general, these sizes are far more appropriate for the typical retail trader's account size than Standard Lots. (Professionals who trade with standard lots do so because their accounts are large enough to withstand the drawdowns, while beginners with small accounts tend to try and fail due to the high Risk of Ruin factor; don't be blinded by greed, always practice strict risk control and make your profits wisely.)

This answer is a bit of a technicality and will have no impact on your trading but it's worth knowing to avoid sounding like a newbie among your fellow traders in the future.

Many beginners mistakenly refer to all currency pairs as "crosses" such as "the EUR/USD cross". The EUR/USD is not a cross, but EUR/JPY is. Likewise, GBP/USD is not, but GBP/JPY is. In these cases, what he/she really means to say is just currency pair or Forex pair.

They are all pairs. Major pairs and cross pairs, however, are two entirely different categories.

Technically, a major pair is any currency pair that involves the US Dollar. This meaning originated at a time when the US Dollar was widely accepted as the international reserve currency of choice (for the most part, it still is at the time of this writing but many would argue that this won't last much longer under the current global Forex climate.) The most widely-traded of the majors are: EUR/USD, GBP/USD, USD/JPY and USD/CHF. They are NOT "crosses".

A cross pair is any Forex pair that does not involve the US Dollar, such as EUR/JPY and GBP/CAD. The name comes from the historical fact that these pairs are actually a combination, or cross, of two major pairs. For example, if you short sell the EUR/JPY, you are actually simultaneously short selling two majors, EUR/USD and USD/JPY, at the same time. The USD cancels out.

Again, this is not of vital importance to your ability to trade profitably but it's just worth knowing these things if you plan to become a professional Forex trader. It's just a matter of having a grasp of the basic terminology in your field.

When beginners learn to trade Forex, one of the first terms they are bombarded with are leverage and margin requirements.

In short, leverage is the amount of (virtual) money your broker allows you (the trader) to borrow during the course of your trading activities. For example, if your broker advertises 100:1 leverage (sometimes written 1:100 but the meaning is the same), it means that for every $10 of cash that you deposit into your account, you are allowed to trade $1000 worth of currency. This is, of course, an approximation since the actual number will depend on the current price of the currency -- but this is the basic idea you need to understand. The basic purpose of this is to allow a trader to profit from relatively small movements in the Forex pair by putting up roughly the amount of money that will be risked plus a little collateral on top of that in case of unforeseen events. (The technical definitions are a little more in-depth but this is essentially all you need to know about this part while you learn to trade Forex for the first time.)

Margin or margin requirement just means the amount of money that you need to deposit in order to trade with leverage. In the above example, the $10 would be your margin. In reality, a trader would deposit more than just the margin requirement since you will need funds to absorb any drawdowns. So despite the hype from advertisement, we never recommend that you use the maximum leverage offered by your broker. Always practice sound money management strategies and risk only a small percentage of your risk capital (the money you can afford to lose in the Forex market) per trade. Always consider your risk of ruin -- you can't learn to trade if you're broke after one day or week.

As you may already know, leverage and margin trading are not unique to the currency trading world since leverage is also used heavily in the futures, options, and stock markets -- especially by day traders who need the tiny intraday movements in those markets to be amplified to make their work worth while. While some of our staff members began as stock and futures day traders, we don't condone the use of high leverage for beginners in the Forex market due to the failure rate caused by it.

The Forex market is open 24 hours a day... from Monday morning in Sydney, Australia (their local time) until Friday afternoon in New York (in terms of NY local time). It would be more accurate to say that the currency markets trade 24/5 (24 hours, 5 days per week), not 24/7. However, even with that considered, Forex traders need to know that not every hour of the day is equal.

There are four major financial centers in the world that make up the majority of the daily currency trading volume. The majority of each of these cities' individual impact on the Forex market are centered around their respective banking hours, which are 8:00am to 5:00pm in each of their own local time zones. This produces a cyclical daily pattern of market conditions as each market: opens, progresses through its lunch hours, and then (generally) overlaps with another market's opening hours as it draws toward its closing hour.

This is especially important to day traders since the market conditions during a typical Tokyo and Sydney session are very distinctly different from those of the New York and London (and European Union, to a lesser extent) sessions. The daily peak hours for Forex are the hours during which London and New York sessions overlap.

In terms of Eastern Time (GMT+5, the New York City time zone that American TV revolves around), the four major financial centers' market hours are:

5pm to 2am: Sydney, Australia
8pm to 5am: Tokyo, Japan
3am to 12pm: London, UK
8am to 5pm: New York, USA

Check timeanddate.com for a conversion to your local time zone.

One hour before the London open is the Frankfurt open. Though much smaller, it still often causes significant price action on many major pairs ahead of the London open.

NOTE - Summer/Daylight Savings Time Change Warning: For simplicy, we've listed the above times since they are accurate most times of year, but keep in mind that England changes to British Summer Time on a different date than the United States changes to Daylight Savings Time. The weeks in between will shift the above hours from both perspectives. So for a more universally accurate picture, always look for the period of 8am to 5pm (8:00 to 17:00) in the local time zone of each session according to current summer time status, then convert that time to your current local time. That is the most technically accurate session time.