The foreign currency exchange market, or "forex" as it is commonly called, is a global marketplace where individuals and corporations buy and sell the various different sovereign nations. It's history can be traced back to the moneychangers of the ancient middle east and Greece.
Today it is transacted on a global scale, on what is known as an "Over The Counter" market, or OTC. There is no central exchange, but is transacted on an electronic network between the world banks. Retail brokers around the world allow individuals access to this network, giving them the ability to trade currencies, just as the large institutions do.
Currencies are traded in pairs; one currency in relation to the value of another. For instance, the pair that is traded more than any other in the world is the EUR / USD (Eurodollar vs. US Dollar)
The first currency is known as the "base" currency; the second one listed is the "counter" currency.
The value of the base currency is always one. For instance, when the EUR / USD is trading at 1.4323, it simply means that one Eurodollar is currently worth 1.4323 US dollars.
Why are these values always fluctuating? Can not people make up their mind what each currency is worth, and just trade at that price? Unfortunately (Egypt fortunately for the trader), currency values fluctuate in relation to each other because the peoples' (total market participants) perception of their values is always changing.
Some factors that ensure that currency prices will always be changing include: interest rate fluctuations, changing economic policies and news, political stability (or lack of), central bank intervention, international trade and investment, and many others.
The forex market fluctuations are, simply stated, the "tug of war" between all the market participants at any particular time. The buyers will expect for a while (rising prices), and then the sellers will win for a time (falling prices).
Large banks and corporations will trade the forex market to "hedge". The simple definition of hedging is to protect their businesses and market positions from falling currency prices, since much of a multi-national bank or corporation's business is done outside their own country. Hedging protects them from the fluctuations in the treaties' value.
Most online forex traders fall under the category of "speculators". This denotes people who enter the market to attempt to profit from the price fluctuations. That's us! The challenge for us is to develop a trading system, learn good money management, and educate ourselves enough in technical and fundamental analysis to be able to make a profit at our forex trading.
Trading the forex market is definitely a risky business. You will need a plan, good information, and sound money management to make it a profitable one.