Forex trading is the simultaneous buying of one currency and selling another. Traders make money based upon currency movements. Currencies are always traded in pairs. You can never trade just one currency. For example you can never just buy or sell US Dollar. If you’re buying US Dollar you’re always selling another currency, and if you’re selling US Dollar you are always buying another currency. See the table below for a list of most traded pairs:

The symbol of the first currency is called the base currency (i.g. the EUR from EUR/USD pair) and the second symbol is called the counter currency (i.e. the USD from the EUR/USD pair). If it’s confusing you can just think of a pair as one item and trade it that way. This way when you’re trading you’re buying or selling only one item.
For illustration let’s use EUR/USD and call this pair a euro. Now, when we trade we only need to answer one question:
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do we want to buy or sell euro?
If our technicals or fundamental tell us that Euro’s value will increase than we buy euro (go long, buy this pair, buy our item ‘euro’) and when our analysis tell us that Euro’s value will decrease than we sell euro (go short, sell this pair, sell our item ‘euro’).

For learning’s sake let’s just remember the base and counter concept, so you always have in mind that whether you are going long or short on the first currency you have another one pushing against you.

OK! It’s time to go little dipper. Here is how quotes work in forex and how you trade them:

The bid/ask price on any pair represents the value of the counter currency to the base currency.

Example 1:
EUR/USD is trading at 1.3851 bid price and 1.3853 ask price

which tells you that you’ll need 1.3851 US Dollars to buy 1 Euro or 1.3853 US Dollars to sell 1 Euro.

Example 2:
USD/JPY is trading at 116.14 bid price and 116.18 ask price

which tells you that you’ll need 116.14 Yen to buy 1 US Dollar or 116.18 Yen to sell 1 US Dollar.

- The bid price, as you might have already understood above, is the price that you’ll pay if you decide to buy (go long) that pair, and
- The ask price is the price that you’ll pay if you decide to sell (go short) that pair.

The difference between the bid and ask price is called a spread.
The spread is the only price/fee you pay to trade forex. Spreads differ from broker to broker but in general you’ll get spreads from 2 to 7 pips. The most popular pairs have lower spreads (i.e. EUR/USD less than three pips spread – most of the time 2 pip spread); less popular ones have higher spreads (i.e. GBP/JPY from 7-15 pips spread – normally around 9).

Note that these spreads are not fixed and they can change based on market conditions. The original spreads that a broker advertises is not valid when market is highly volatile during economic announcements. So, be careful!

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