Trading in currencies (as in shares) by traders in the hope of making profits is forex trading. Traders buy and sell currencies with the hope of making a profit when the value of the currencies changes in their favor, whether from market news or events that take place in the world. The forex market is the largest market in the world with daily reported volume of over 1.8 trillion making it one of the most exciting markets for trading.
The spot FX market is unique to any other market in the world, as trading is available 24-hours a day. Somewhere around the world, a financial center is open for business, and banks and other institutions exchange currencies, every hour of the day and night with generally only minor gaps on the weekend. Essentially foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their trading day.
In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.
Currencies are always traded in pairs. You always buy one currency using another currency. For example, the most important currency pair (based on the economics of the world) is the EUR/USD. This means that i can buy EUR using USD or i can buy USD using EUR.
Each currency pair is assigned a ratio which is indicative of the strength and the exchange rate of the currency. For eg. if EUR/USD is 0.9600, it means that 1 EUR is worth 0.9600 USD. So you can buy 10,000 EUR using 10,000 x 0.9600 = 9600 dollars.
Assume:
A trader purchases 10,000 euros in the beginning of 2001 when the EUR/USD rate was .9600. 1 EUR is worth 0.96 USD and so he has to pay $9600 to buy 10,000 EUR.
In May of 2003, if the EUR/USD rate goes up to 1.1800, then using the 10,000 EUR which he has, he can buy USD. Now 1 EUR is worth 1.18 USD and so 10,000 EUR would be worth 11,800. So now the trader has made a profit of 11,800 - 9600 (amt spent to buy 10,000 EUR) = $2200.
The first currency in any currency pair is called the base currency. So in the above case EUR is the base currency.
Hope you all have understood the above. If any queries, lemme know...