What is Forex?

December 6th, 2014

Forex is the largest and most liquid financial market in the world; the average trade consists of trillions per day.
The foreign exchange (Forex) is a market where traders buy, sell, exchange and speculate on currencies. It consists of trading one currency for another.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with Forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Average daily international foreign exchange trading volume was $4.0 trillion in April 2010 according to the BIS triennial report.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no ‘inside information’. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

There is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell (“ask”, or “offer”) to a wholesale customer and the price at which the same market-maker will buy (“bid”) from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4232 a pip would be the ‘2’ at the end. So the bid/ask quote of EUR/USD might be 1.4232/1.4233.
Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips

(so in our example 1.4232/1.4233 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will “resettle” open positions (again collecting the bid/ask spread).
Currency speculators can work during the day and trade in the evenings, taking advantage of the market’s 24 hours long trading day.

Example of Trading Currencies:

Example of Making Money by Buying Euros:

Currency

Majors

Crosses

How to Read Forex Quotes

Mini Account

WHAT IS a LOT?

What is a Pip?

Long or short position

Margin

Leverage

Bid and Ask Spread

Stops and Limits

The Market Hours