What Is Forex?

FOREX — the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations that must pay wages and other expenses in nations different from those 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 the smallest 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.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank over-the-counter (OTC) market, which means that there is no single universal exchange for a specific currency pair. The foreign exchange market operates 24 hours per day from Monday to Friday between individuals with Forex brokers, brokers with banks, and banks with banks. When the European session ends, the US session is still active; when it ends, the Asian session starts. This way, 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 financial markets.

Average daily international foreign exchange trading volume was $7.5 trillion in April 2022 according to the triennial report by the Bank for International Settlements.

Like any other market, there is a bid/offer spread (the difference between the buying price and the selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a customer and the price at which the same market-maker will buy ("bid") from the same customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.2238, a pip would be the '8' at the end. So the bid/ask quote of EUR/USD look like 1.2238/1.2240.

Nowadays, most individual currency speculators will trade using a broker, which will typically have very competitive spreads on major currency pairs. Minor currency pairs and exotic pairs can see wider spreads: 1-15 pips for the former and 10-500 for the latter. The broker will often give their clients a very high leverage, thereby facilitating clients to trade larger volumes, which in turn, helps those brokers to earn more from the bid/ask spread. In the United States, Forex brokers are not regulated by the Securities and Exchange Commission (SEC) as they do not sell securities. Instead, they fall under supervision by the Commodity Futures Trading Commission (CFTC). They do not typically charge margin interest, however, they charge rollover interest for keeping positions open overnight. This rollover interest is known as a swap and can be both positive or negative.

Forex traders earn in this market by selling a currency pair (shorting it) when they believe that its price will go down or by buying a currency pair (going long) when they expect the price to grow. There is no delivery of actual currencies in such trading. When a position is closed, traders receive their profit (or see their loss deducted from their account) in their account currency.

Individual currency speculators can trade in the morning, during the day, in the evening, and even at night, taking advantage of the market's 24 hours long trading session.

If you want to know more about how to start trading in Forex, please proceed to our free Forex course.