How the forex market works: currency pairs, quotes, sessions and who moves prices
Before charts, strategies or indicators, you need to understand what you're trading and why prices move. This lesson covers the structure of the market.
Currencies are always traded in pairs
You can't buy "the dollar" on its own; you always exchange one currency for another. So forex prices are quoted as pairs:
EUR/USD = 1.0850
- The first currency (EUR) is the base currency.
- The second (USD) is the quote currency.
- The price tells you how much of the quote currency buys one unit of the base: 1 euro = 1.0850 US dollars.
When you buy (go long) EUR/USD, you're betting the euro will strengthen against the dollar (the price goes up). When you sell (go short), you're betting the euro will weaken against the dollar (the price goes down). In retail trading you can sell first without owning the currency, because you're trading price changes through the broker.
You already know this from daily life: when a Kenyan news report says "the shilling traded at 129 to the dollar", that's USD/KES = 129: one dollar costs 129 shillings. If USD/KES rises to 135, the dollar strengthened and the shilling weakened.
Currency codes you'll see
| Code | Currency | Nickname |
|---|---|---|
| USD | US dollar | "greenback" |
| EUR | Euro | "fiber" (EUR/USD) |
| GBP | British pound | "cable" (GBP/USD) |
| JPY | Japanese yen | |
| CHF | Swiss franc | "swissy" |
| AUD | Australian dollar | "aussie" |
| CAD | Canadian dollar | "loonie" |
| NZD | New Zealand dollar | "kiwi" |
| KES | Kenyan shilling | |
| ZAR | South African rand |
Types of pairs
| Type | Definition | Examples | Typical features |
|---|---|---|---|
| Majors | USD paired with another major currency | EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, NZD/USD | Most traded, lowest spreads, most information available |
| Minors / crosses | Two major currencies without USD | EUR/GBP, EUR/JPY, GBP/JPY, AUD/NZD | Slightly higher spreads; can move sharply (e.g. GBP/JPY) |
| Exotics | A major currency with an emerging-market currency | USD/ZAR, USD/TRY, USD/KES (rarely offered) | Wide spreads, lower liquidity, sudden big moves |
Beginners usually study one or two majors (often EUR/USD) deeply instead of jumping across many pairs.
Gold and indices
Many forex brokers also offer gold (XAU/USD), oil and stock indices as CFDs. They behave differently from currencies (often bigger, faster moves) and are covered in trading options explained. Many Kenyan beginners jump straight to gold because it moves a lot; that same volatility is why many lose money fast.
Bid, ask and spread
Every quote has two prices:
| Meaning | |
|---|---|
| Bid | The price you can sell at |
| Ask (offer) | The price you can buy at |
| Spread | Ask − bid: a cost you pay on every trade |
Example: EUR/USD bid 1.0850, ask 1.0851 → spread 0.0001 (1 pip, explained in the next lesson). The moment you open a trade, you're slightly negative because of the spread. Spreads widen during news, at market open and in quiet hours.
Where is the forex market?
There's no single exchange. Forex is over-the-counter (OTC): a global network of banks, brokers and electronic platforms trading directly with each other. That's why:
- prices can differ slightly between brokers;
- your broker matters a lot (regulation, pricing, execution; see brokers in Kenya).
Who trades forex (and moves prices)?
| Participant | Why they trade | Effect |
|---|---|---|
| Central banks (Fed, ECB, Bank of England, CBK) | Set interest rates, manage currency and inflation, hold reserves | Biggest long-term influence |
| Commercial and investment banks | Serve clients, make markets, trade for profit | Most of the daily volume |
| Companies | Pay for imports, receive export income, hedge risk | Steady flows (e.g. Kenyan importers buying dollars) |
| Investment funds and hedge funds | Invest abroad, speculate on macro trends | Large, sometimes fast moves |
| Governments | Trade, debt payments | Occasional big flows |
| Retail traders | Speculation | A small share of total volume; they mostly follow price, they don't move it |
Understanding this helps you stay humble: individual retail traders don't move EUR/USD; big institutions and economic news do.
Why do currency prices move?
In the long run, mainly:
- Interest rates: higher rates tend to attract money into a currency.
- Inflation: high inflation erodes a currency's value.
- Economic growth and jobs: strong economies attract investment.
- Trade and capital flows: exports, imports, foreign investment, debt repayments.
- Risk sentiment: in fear, money often flows to "safe havens" (USD, JPY, CHF, gold).
- Politics and shocks: elections, wars, policy surprises.
In the short run, prices move with orders: news releases, big institutional trades, and traders reacting to levels and to each other. Short-term moves contain a lot of randomness. Covered in depth in fundamental analysis.
Trading sessions in Kenyan time (EAT)
Forex trades 24 hours a day from Monday to Friday, passing between financial centres. Approximate session times in East Africa Time (they shift by about an hour when Europe and the US change their clocks for daylight saving):
| Session | Approx. EAT | Character |
|---|---|---|
| Sydney | 01:00 – 10:00 | Quieter; AUD and NZD active |
| Tokyo (Asia) | 03:00 – 12:00 | JPY pairs active; often ranges on majors |
| London | 10:00 / 11:00 – 19:00 / 20:00 | The busiest session; big moves on EUR, GBP |
| New York | 15:00 / 16:00 – 00:00 / 01:00 | USD news (often 15:30 or 16:30 EAT); active |
| London–New York overlap | ~15:00 – 19:00 / 20:00 | Highest liquidity and often the biggest moves |
The market opens around Sunday night/Monday early morning (Kenyan time) and closes around Friday night/Saturday early morning. Weekend news can cause gaps (the Monday price opens far from Friday's close).
How retail trading works through a broker
- You open an account with a broker and deposit money (often by card, bank or M-Pesa with Kenyan brokers).
- You trade contracts on price changes (most retail "forex" trading is through CFDs or rolling spot contracts); you don't receive physical euros.
- Your profit or loss = price change × position size, minus costs (spread, commission, overnight swap).
- Leverage lets you control a larger position with a small deposit (margin), magnifying gains and losses. See the next lesson.
Key vocabulary
| Term | Meaning |
|---|---|
| Long / short | Buy (expect up) / sell (expect down) |
| Base / quote | First / second currency in a pair |
| Bid / ask / spread | Sell price / buy price / difference |
| Liquidity | How easily large amounts trade without moving price |
| Volatility | How much and how fast price moves |
| Gap | A jump in price between one quote and the next (e.g. over a weekend) |
| OTC | Over-the-counter: traded between parties, not on one exchange |
| CFD | Contract for difference: a contract paying the price change of an asset |
Summary
- Currencies trade in pairs: price = how much quote currency buys one unit of base currency.
- Buy (long) if you expect the base to strengthen; sell (short) if you expect it to weaken.
- Majors are the most liquid; exotics and gold are more volatile and costly.
- Forex is OTC, driven by central banks, banks, companies and funds; retail traders follow.
- The busiest sessions (London and New York) fall in Kenyan daytime and evening.
Check yourself
In EUR/USD, which currency is the base?
Show answer
EUR
If USD/KES rises from 129 to 135, did the shilling strengthen or weaken?
Show answer
weaken
What is the difference between the ask and the bid called?
Show answer
spread
Which session overlap usually has the highest liquidity? (two cities)
Show answer
London and New York
Is forex traded on one central exchange or over-the-counter? (write OTC or exchange)
Show answer
OTC