How the forex Market Works?

As forex is all about foreign exchange, all transactions are made up from a currency pair - say, for instance, the Euro and the US Dollar. The basic tool for trading forex is the exchange rate which is expressed as a ratio between the values of the two currencies such as EUR/USD = 1.6048. This value, which is referred to as the 'forex rate' means that, at that particular time, one Euro would be worth 1.4086 US Dollars. This ratio is always expressed to 4 decimal places which means that you could see a forex rate of EUR/USD = 1.4086 or EUR/USD = 1.4687 but never EUR/USD = 1.40865. The rightmost digit of this ratio is referred to as a 'pip'. So, a change from EUR/USD = 1.4086 to EUR/USD = 1.4068 would be referred to as a change of 2 pips. One pip, therefore is the smallest unit of trade.

With the forex rate at EUR/USD = 1.4086, an investor purchasing 100 Euros using dollars would pay $1,003.30. If the forex rate then changed to EUR/USD = 1.5020, the investor could sell their 1000 Euros for $1,202.10 and bank the $73.20 as profit. If this doesn't seem to be large amount to you, you have to put the sum into context. With a rising or falling market, the forex rate does not simply change in a uniform way but oscillates and profits can be taken many times per day as a rate oscillates around a trend.

When you're expecting the value EUR/USD to fall, you might tradethe other way by selling Euros for dollars and
buying then back when the TRAD rate has changed to your advantage.