The foreign exchange market, commonly referred to as Forex or FX, is the global market for trading one country's currency for another.
The forex market is the largest and most liquid market in the world, with trillions of dollars traded daily. It has no central location, and no government authority oversees it.
Instead, forex is an electronic network of banks, brokerages, institutional investors, and individual traders (they mostly trade through brokers or banks).
Forex is a global market for the exchange of national currencies.
Foreign exchange websites make up the world's largest stock market by face value, with trillions of dollars traded every day.
Forex trading uses currency pairs, priced in terms of one against the other.
Futures and futures contracts are another way to participate in the forex market.
The forex market determines the daily value, or exchange rate, of most of the world's currencies. If the traveler exchanges dollars for euros at an exchange kiosk or a bank, the number of euros will depend on the current foreign exchange rate. If the cost of imported French cheese is suddenly higher in groceries, it could mean that the euro has appreciated against the US dollar in foreign exchange.
Forex traders seek to profit from the constant fluctuations in currency values. For example, a trader might expect the British pound to appreciate in value. The trader will exchange US dollars for British pounds. If the pound then increases, the merchant can make the transaction in the opposite direction, getting more dollars for the pounds.
In forex trading, currencies are listed in pairs, such as USD/CAD, EUR/USD, or USD/JPY. It represents the US dollar (USD) against the Canadian dollar (CAD), the euro (EUR) against the US dollar, and the US dollar against the Japanese yen (JPY).
There will also be a price associated with each pair, such as 1.2569. If this is the USD/CAD pair, it means that it costs 1.2569 CAD to buy 1 USD. If the price goes up to 1.3336, the price is now 1.3336 CAD to buy 1 USD. The US dollar has increased in value against the Canadian dollar, so buying one US dollar costs more Canadian dollars.
In the forex market, currencies are traded in contracts, called micro, mini and regular contracts. A micro lot is 1,000 of a given currency, a mini lot is 10,000, and a standard lot is 100,000. Trades are made in specific groups of currencies. For example, a trader can exchange seven micro contracts (7000), three mini contracts (30,000), or 75 standard contracts (7,500,000).
Trading in the foreign exchange market
Historically, participation in the foreign exchange market has been for governments, large corporations, and hedge funds. In today's world, currency trading is as easy as clicking a mouse, and accessibility is not an issue. Many investment firms allow individuals to open accounts and trade currencies through their platforms.
This is not like a trip to the foreign exchange booth. This process is completely electronic with no physical exchange of money from one hand to another.
Instead, traders take a position in a particular currency in the hope that there will be some upside movement and strength in the currency they are buying (or weakness if they are selling) so that they can make a profit.
Forex market vs other markets
There are some fundamental differences between forex and other markets.
First of all, there are fewer rules, which means that investors are not bound by strict standards or regulations like those found in the stock, futures, and options markets. There are no clearinghouses and no central bodies that oversee the forex market.
Second, since the trades are not done on the traditional exchange, there are lower fees or commissions like those in other markets.
After that, there is no limit to the time you can and cannot trade. Since the market is open 24 hours a day, you can trade at any time.
The trader believes that the European Central Bank (ECB) will ease monetary policy in the coming months as the Eurozone economy slows. As a result, the trader is betting that the euro will fall against the US dollar and short-sell 100,000 euros at the exchange rate of 1.15. Over the next several weeks, the European Central Bank is signaling that it may indeed loosen its monetary policy. This brings the euro exchange rate down to 1.10 against the dollar. This results in a profit for the trader of $5,000.