Currency exchange rates or Forex quotes are always quoted in pairs e.g. GBP/USD = 1.9714. The currency on the left is the base currency, and the currency on the right is the quote or counter currency. The base currency is so called because it is the basis of the trade.

The quoted value of the pair is the amount of the quote currency equal to 1 unit of the base currency. In the example above, one GBP (UK pound) = 1.9714 USD (U.S. dollars). If you expect the value of the base currency to increase against the value of the quote currency then you buy the base currency and sell the quote currency. For example, for the currency pair EUR/USD = 1.4722, suppose you expect the value of the EUR to increase against the value of the USD. Then you would purchase Euros (EUR), and simultaneously sell U.S. dollars (USD). (This is also known as going long.)

Now, take the example of the Forex quote CHF/USD = 0.8944, where you expect the CHF (Swiss franc) to fall against the value of the U.S. dollar (USD). In this case you would sell USD, and simultaneously buy CHF. (This is known as going long.)

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Forex exchange rate quotes are actually quoted at two slightly different prices. For example the Euro vs. the U.S. dollar might be quoted as EUR/USD = 1.7420/1.7425. The quote on the left is the Bid price, while the quote on the right is the Ask price. The difference between the two quotes is known as the Bid/Ask Spread (or just the Spread). The bid price is the price at which the dealer is prepared to buy the currency from you. And the Ask price is the price at which the dealer will sell you the currency.

So if you purchased a lot of currency, and immediately sold it again before the relative values had changed, you would lose on the deal, but the dealer would gain. Forex dealers earn their commission from the Spread between the Ask and the Bid prices. Forex brokers are therefore in a win/win situation, because it makes no difference whether you profit or lose from your trade (or even if the relative values stay the same) the dealer always profits.

Forex quotes are usually quoted to four decimal places, for example:

USD/EUR = 0.6793
EUR/GBP = 0.7468
GBP/CHF = 2.2041
CHF/AUD = 1.0095
etc.

The one exception to this among the major currencies, is where the Japanese Yen (JPY) is the quoted currency. Then the Forex quotes are usually quoted to just two decimal places, as in the following examples:

USD/JPY = 109.32
EUR/JPY = 160.95
etc.

(This is because the value of the Japanese Yen, is about one hundredth of one U.S. dollar.)

A change of 1 in the last decimal place is called a Pip. A Pip is the smallest amount by which the relative values of two currencies can change. Forex broker commissions, (the Ask/Bid Spread) is typically around 2 to 5 Pips.

During an average day's trading, a pair of currencies will typically move by between 20 and 50 Pips. However, if the Forex market is volatile much larger changes can occur during a day's trading. An example of this was the GBP/USD pair, which changed by as much as 100 - 200 Pips on some days in November 2007.

Because daily currency changes in the Forex market, are normally so small, you need to trade with substantial amounts of currency to make a decent profit.

For example suppose you expect the Euro (EUR) to increase against the USD (U.S. dollar). So you decide to purchase 100 Euros when the quote for the EUR/USD = 1.4720/1.4725. 100 EUR will cost you $147.25. Now suppose the EUR increases by 50 Pips against the USD, and later in the day the Forex quote is EUR/USD = 1.4770/1.4775.

So you sell your 100 Euros, and simultaneously buy U.S. dollars. You sell your EUR for 100 x 1.4770 = $147.70. So your profit on the day's trading is $147.70 - $147.25 = $0.45. Even if you had purchased 1,000 Euros instead, you would still only have made a measly $4.50, on the day's trading.