The 1971 abandonment of the Bretton Woods Accord and the subsequent unwinding of the system of fixed exchange rates gave rise to the foreign exchange market as we know it today.
Forex refers to the foreign exchange market, where brokerage firms and banks are connected over an electronic network that allows them to convert the currencies of countries around the globe.
The forex market is the largest and most liquid financial market in the world. The daily dollar volume of currencies traded in the currency market exceeds $1.9 trillion, many times larger than the combined volume of all U.S. equities and futures markets.
While forex trading used to be executed exclusively between government central banks and commercial and investment banks, trading forex has become increasingly accessible to private investors thanks to the PC and internet.
The most commonly traded currencies are the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The FX market runs 24-hour hours a day, 5 days a week with continuous access to global dealers. Trading is not centralized on a physical location or an exchange, as with the stock and futures markets.
Foreign Exchange is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).
For example, you would execute a trade when you expect the currency you are buying to increase relative to the one you are selling. If the currency you are buying increases in value, you must sell the other currency to close the position and take a profit. The first currency in the pair is called the base currency and the second is called the counter or quote currency. Usually the US currency is the base currency and quotes are given in $1 USD per counter currency, e.g. USD/JPY. The exceptions are the British Pound, the Euro and the Australian Dollar.
Understanding forex quotes: 1 unit of the base curreny = the exchange rate in the quote currency. Eg if EUR/USD is trading at 1.2762, 1 Euro will buy you 1.2762 Dollars.
Understanding contract size in forex trading: The contract size is normally a lot of 100,000. This means per standard contract you are controling 100,000 units of the base currency. For this contract size, each pip (the smallest price increment) is worth $10. Many firms offer mini accounts now where you can trade units of 10,000, where the pip value is $1.
Trading the Forex market allows very low margin requirements relative to other markets.