Currency Markets

Foreign exchange is the simultaneous buying of one currency and sell¬ing of another. Currencies are traded through a broker or dealer and are executed in pairs, for example, the Euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).
The foreign exchange market (Forex) is the largest financial mar¬ket in the world, with a volume of over $2 trillion daily. This is more than three times the total amount of the stocks, options, and futures markets combined.
Unlike other financial markets, the Forex spot market has no physical location, nor a central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency for another. The lack of a physical exchange enables the Forex to operate on a 24-hour basis, spanning from one time zone to another across the major financial centers. This fact has a number of ramifications that we will discuss throughout this book.
A spot market is any market that deals in the current price of a financial instrument. Futures markets, such as the Chicago Board of Trade (CBOT), offer commodity contracts whose delivery date may span several months into the future. Settlement of Forex spot transactions usually occurs within two business days.

CURRENCY PAIRS
Every Forex trade involves the simultaneous buying of one cur-rency and the selling of another currency. These two currencies are always referred to as the currency pair in a trade.
BASE CURRENCY
The base currency is the first currency in any currency pair. It shows how much the base currency is worth, as measured against the second currency. For example, if the USD/CHF rate is 1.6215, then one U.S. dollar is worth 1.6215 Swiss francs. In the Forex markets, the U.S. dollar normally is considered the base currency for quotes, meaning that quotes are expressed as a unit of US$1 per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the Euro, and the Australian dollar.
QUOTE CURRENCY
The quote currency is the second currency in any currency pair. This is frequently called the pip currency, and any unrealized profit or loss is expressed in this currency.
PIPS AND TICKS
A pip is the smallest unit of price for any foreign currency. Nearly all currency pairs consist of five significant digits, and most pairs have the decimal point immediately after the first digit; that is, EUR/USD equals 1.2812. In this instance, a single pip equals the smallest change in the fourth decimal place, that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equals 1/100 of a cent.
One notable exception is the USD/JPY pair, where a pip equals US$0.01 (one U.S. dollar equals approximately 107.19 Japanese yen). Pips sometimes are called points.
Just as a pip is the smallest price movement (the y axis), a tick is the smallest interval of time along the x axis that occurs between