Where Forex is Traded
As the value of one currency fluctuates relative to another, traders will gain profits or suffer losses. Retail customers participate in the Forex market as speculators who are hoping to profit from flucuations in currency rates.

There is three major ways to trade in Forex market:
On an exchange market that is regulated by the Commodity Futures Trading Commission (CFTC).

For example, the Chicago Mercantile Exchange offers Forex options on futures products. Exchange-traded Forex futures and options provide their users with a liquid, secondary market for contracts with a set unit size, a fixed expiration date and centralized clearing.

On an exchange that is regulated by the Securities and Exchange Commission (SEC).
For example, the Philadelphia Stock Exchange offers options on currencies (i.e., the right but not the obligation to buy or sell a currency at a specific rate within a specified time). Exchange-traded options on currencies have characteristics similar to exchange-traded futures and options (e.g., a liquid, secondary market with a set size, a fixed expiration date and centralized clearing).

In the off-exchange, also called the over-the-counter (OTC) market.
A retail customer trades directly with counter-party and there is no exchange or central clearinghouse to support the transaction. Off-exchange trading is subject to limited regulatory oversight.

The Forex market is not a market in the traditional sense because there is no centralized trading location. The off-exchange Forex market is a large, growing and liquid financial market that operates 24 hours a day. A large amount of the transactions are conducted by telephone or electronic trading systems.

The prime market for currencies is the "inter-bank market" where large corporations, banks, insurance companies, and other large financial institutions manage the risks related with variations in currency rates. The "inter-bank market" is only available to entities that trade in large quantities and have a very high net worth. A secondary OTC market has developed that permits retail investors to participate in Forex transactions. While this secondary market does not provide the same prices as the inter-bank market, it does have lots of same characteristics.

Currency Rates and Quotations
Currency rates are quoted in pairs because you are buying one currency while selling another. The first currency is the base currency and the second currency is the quote currency. The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency.

For example, if EUR/USD has an ask price of 1.2178, you can buy one Euro for 1.2178 US dollars. Currency pairs are often quoted as bid-ask spreads.
The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price) and the second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price).

In other words, a EUR/USD spread of 1.2177/1.2187 means that you can sell one Euro for $1.2177 and buy one Euro for $1.2187.
A dealer may not quote the full exchange rate for both sides of the spread. For example, the EUR/USD spread discussed above could be quoted as 1.2177/87. The customer should understand that the first three numbers are the same for both sides of the spread.

* Trading off exchange Forex on margin carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.