On the other hand, since the market is so huge, it takes a lot of force to make a currency move by even the slightest fraction. That means that the major players here are large financial institutions and anyone active on the global markets – exporters, governments – you get the idea. For you and me – retail traders – any investment we can afford would show a very, very small change in fortune. To make it attractive, though, brokers invest alongside us to enlarge our investment. That’s called leveraging our investment, or trading on margin. But more about that in our next course. Let’s suffice by saying that leverage is another fact that makes forex popular for retail traders.

SO what is forex? It’s the investment in relative values between currency pairs. You probably took part in the forex market last time you went abroad and changed your home currency for local currency.

When trading, we invest in forex pairs – the Euro against the dollar, the pound against the yen, and so on. We refer to these pairs using the 3-letter designations of each pair. EUR for euro, USD for US dollar, and thus EURUSD is a forex pair comparing the values of the dollar and the euro. GBPJPY – the same: a pair describing the relationship between the British pound and the Japanese yen.

And now for the mechanics. Of these 6 letters, the first three describe the base currency. One unit of the base currency equals one unit of the forex pair. The next 3 letters describe the COUNTER currency, or QUOTE currency. That’s the currency that gives the pair its value: how many units of counter currency equal one unit of base currency.

So, if one EURUSD equals 1.1125, we’re saying that for one euro, we’ll be getting or paying one dollar 11 cents and 25 hundredths of a cent. Yep, the moves are so small we measure them in 1 ten-thousandths of a dollar. We call that tiny unit a pip, and we’ll talk about those later on..

The same is true of the Euro-GBP, but here, if the pair is worth 0.8624, we’re saying that 86 pence and a bit equal one Euro. The 4 at the end represents 4 pips, or 4 ten-thousandths of a POUND – the counter-currency in the pair

Ok, before we move on, a word about majors, minors and exotics. We’ve got literally hundreds of currencies in the world today, and with cryptos that’s going to soon increase. The major currencies are the ones in which most international trade is conducted. That’s the US dollar for 90% of all trades followed by the Euro, the pound, the Yen, the Swiss franc, and the Australian and New Zealand Dollars. Actually, the Chinese Yuan is up there too, but they’re not included because the Chinese government won’t let us trade it. All the rest are referred to as minors.

When it comes to forex pairs, we also have majors – those are any of the major pairs paired up against the US dollar. Minor pairs are non-dollar combinations of major pairs. And exotic pairs are USUALLY mixes of major currencies with minor ones, like the Euro-Turkish Lira or the Dollar-Swedish Crown.

But let’s get back to the pound: if we look at this chart here, we can see that on this very dramatic week in October, the EURO-pound plunged by 6 entire pennies on each euro. If we’d invested £100 in a perfect position to short the euro-pound, that’s from here to here, we’d have made 6 pounds. Nothing to really write home about. But remember I said the word leverage?

Well, most online brokers today will help you increase a forex position by anything between 1 to 20 and 1 to 400. Let’s say you’re in Europe and the regulator restricts leverage to 1 to 20 – you’d still have had your position multiplied by a factor of 20. Your profit would THEN have been 120 pounds. On a £100 investment! In a week!! Now THAT’s something to tell the folks about.