The forex market is the world's largest and most active trading market, as well as being the most liquid. While foreign exchange trading has long been dominated by large global banks and institutions, it has become increasingly popular and accessible to individual investors.
Trading currencies is done slightly differently to other asset classes. Trading in other assets involves trading in one market with profit and loss based on absolute returns. For example, if you buy and the market goes up, you make money. If you buy and it goes down, you lose money.
Forex trading is done using currency pairs, with one currency being traded against another. Returns in currency markets are relative, with profit and loss being measured by how one currency performs relative to another. For example, on a given day, the US dollar (USD) could appreciate relative to the euro (EUR), Swiss franc (CHF) and British pound (GBP), but decline relative to the Japanese yen (JPY), Canadian dollar (CAD) and Australian dollar (AUD).
As the world's reserve currency, trading in US dollar-related currency pairs is the foundation of currency trading around the world. The most active pairs (also known as the major forex pairs) include EUR/USD, GBP/USD, USD/CHF and USD/JPY. Currency pairs that don't involve USD are known as cross pairs. Popular cross pairs include GBP/EUR, EUR/JPY and AUD/CAD.
Pricing in currencies is based on the first currency in the pair, also known as the base currency. In the case of EUR/USD, this means how much USD it would take to buy one EUR. When EUR/USD goes up it means that EUR is gaining in value and when it goes down, it means EUR is losing value against the USD.
Trading in resource currencies such as AUD/USD and USD/CAD is also popular, as the valuation of these currencies with those of other resource-producing nations such as the New Zealand dollar (ZND), Norwegian krona (NOK) and South African rand (ZAR) tend to be influenced by commodity prices. These represent a significant part of the goods traded by these countries. Note that CAD and NOK tend to be more sensitive to energy prices, AUD and NZD to metal and grain prices and ZAR to precious metal prices.