Forex, a.k.a. FX, is short for Foreign Exchange, which is usually referring to trades occurring in the Currency market. Forex trading is the buying and selling of foreign currencies on an (OTC) over-the-counter exchange, and on a daily basis there are over $2trillion dollars in trades that occur world wide. The 'spot' Forex markets opened up to the average consumer for trading only in the late 1970's. In the US and for US traders, legitimate Forex brokers are reviewed and regulated and by the CTFC and NFA. For the longest time the Currency Markets were the "wild west" in that many brokers and trades were unregulated. While it is still a "wild west", recent changes and regulation has made it more tamer and has a lot more stability & recourse now for the average consumer to trade and not see any potential unethical broker practices occur.
Traders can buy and sell a country's currency on their speculations that the value of a countries currency will either increase or devalue in comparison to another countries currencies. Currency values are based on many aspects and can be viewed as a 'pulse' of a country's economy, stability, reliability and credibility in the world market. Value can be influenced by many aspects beyond economic data and news. Political, social & even environmental impacts and other speculative interests and forecasts can have a tremendous impact on a currency, so it is not just a central bank making adjustments or changes to their policies that has influence. This is what makes the currency markets so fluid, volatile, highly risky and nearly unpredictable at times. From an earthquake, natural disaster or terrorist attack to riots and civil unrest, all the way to political changes or speculations on policy changes can add to a decrease or increase global confidence. All these aspects and more can all play a part in a currency value changing.
FX operates in markets world wide 24hr per day except for the weekends. As various world exchanges and markets open and close within a 24hr period a Forex trader can see swings and volatility occur regularly relative to their location. Forex trading is extremely volatile market place and trading it is very risky. Price swings can occur very quickly and often without warning, making it one of the most risky of any trades to engage in. Be warned - this is not easy trading and it is not for those who cannot accept the fact that you can and will lose or be wrong on a trade even if all the technical aspects seem textbook perfect. One thing to remember in Forex is that technicals are only part of the game. As stated earlier, fundamentals as well as market adjustments for being overbought or oversold can play an equal if not bigger part in the value of currency and its movement in any given time.
Forex trading is similar to commodity markets because of the use of Leverage (new rules have limited this leverages in the US to 50:1) which allows a trader to manipulate and trade a larger amount relative to the size of their accounts, however in such a fluid and volatile market the risks greatly increase as well. It is very attractive to many new traders because of the low commission rates per trade and the fluidity of the market. One of the safer aspects to Forex is that Margin Calls and oweing your broker for a trade that lost are often non-existent in how most Forex accounts are set up and automated, meaning you can rarely if never lose more then you have in your account. For most forex accounts if your account balance and margin drops below the minimum requirement to keep your account open & active and able to trade what you have leveraged--then your open trades are automatically closed until such time as you can add to your account.
The Forex markets list its currencies by a 3 letter code (ISO 4217 Code, an international standard code for a country currency) referring to the country and/or currency name. Some examples would be: GBP = Great Britain or British Pound; JPY = Japanese Yen; USD = United States Dollar; AUD = Australian Dollar; NZD = New Zealand Dollar; CAD = Canadian Dollar etc. There are dozens upon dozens of currency pairs to choose from but most traders will interact with what are known as "the majors" because of their fluidity. The EUR/USD pair for example is one of the most heavily traded pairs in the world.
There are numerous currencies from many countries represented in Forex, but the majority of traders will often only interact with "the Majors" which represent the larger more fluid currencies from around the globe. These being the Euro (EUR), the British Pound (GBP), the US Dollar (USD), the Japanese Yen (JPY), the Swiss Franc (CHF), with the Canadian Dollar (CAD) and Australian Dollar (AUD) rounding up the list of the majors. Other currencies could be the Swedish Krona (SEK), the New Zealand Dollar (NZD), the Mexican Peso (MXN) or the Chinese Yuan (CNY). For a complete list of the currency codes, visit: http://en.wikipedia.org/wiki/ISO_4217 but note that not all currencies are traded on the open markets or may be available for trade by your broker.
Further explanation on reading a Forex quote - excerpt from Wikipedia: Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 codes of the currencies involved. The first currency (XXX) is the BASE CURRENCY that is quoted relative to the second currency (YYY), called the COUNTER CURRENCY (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the EURO expressed in US DOLLARS, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates against the USD with the US dollar as the base currency (eg USDJPY, USDCAD, USDCHF). The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and the euro (EUR) where the USD is the counter currency (eg GBPUSD, AUDUSD, NZDUSD, EURUSD).
The FX market exchange prices are affected by numerous influences from their respective central banks and also from political and social influences. They are speculative and reactive markets. Mastering Forex trading is not easy in spite of surface appearances--it takes a lot of time, practice, study and commitment to learn consistency and good money & trade management practices. Check the Forex forum here for the best place(s) & ways to learn and start out in this exciting market, and to ask and get answers to many common questions.
Feel free to contribute to this Wiki.