Forex (or FX) is an acronym for the foreign exchange market or currency market, where currencies from different countries are valued and exchanged. An individual or institution buys one currency and sells another in a simultaneous transaction. Currency trading always occurs in pairs where one currency is sold for another and is represented in the following notation: EUR/USD or USD/JPY. The exchange rate is determined by supply and demand.
What Exactly is Traded in Forex?
It is not a paper stock or physical commodity. It is cold hard cash. More accurately, it is bits of data that represent a tangible currency. However, it is not a single currency you are buying or selling, but rather you are trading one country’s currency against the other. This unique interaction results in currency being traded in pairs. For example, the Euro can be traded against the Dollar, and thus you can buy a currency pair of EUR/USD that represents how many US dollars one Euro is worth. There are hundreds of currencies throughout the world (many of which are tradable), but there are several key currencies and pairs which account for the majority of Forex volume:
|Popular Currency||% Traded||Popular Pair||% Traded|
|Pound (GBP)||15 %||GBPUSD||14%|
Where is Spot Forex Traded?
Forex does not have a physical site, that is, there is no big building like the New York Stock Exchange on Wall Street or the Chicago Board of Trade in Chicago where a bunch of people on the floor or “pit” yell or hand-signal or waive dollar bills to conduct transactions. Instead, Forex operates electronically in the retail off-exchange foreign currency market run entirely through a continuous network of banks and brokers.
Because the currency market is a decentralized market run electronically, there are resulting advantages. Forex traders can trade anywhere, anytime via the internet. It does not have to begin and end the day based on the hours of a particular building or bank located in a particular time zone. Instead, it is 24-hour trading, 5.5 days a week, because there are always different banks operating and offering rates in different places and time zones around the world. Because of its massive liquidity and internet-based platform (no exchanges, no open-outcry pits, no floor brokers), fast-order execution and instant-fill confirmation are routine.
Who Trades Forex?
With over $4 trillion daily trading volume, forex is the largest market in the world, many times bigger than all the world stock and futures markets combined. Not long ago it was the exclusive domain of the mega-rich, banks sending deposits around the world, corporations hedging their exposure to currency risk in different countries or converting their profits, central banks forwarding national economic goals through monetary policy, and billion-dollar hedge funds trying to profit from the market. These same big players still comprise the bulk of the trading volume, but lately the makeup and motives have changed.
The deregulation of the 1990s, coupled with new Internet-based technologies, led brokers to form pools of liquidity for us small traders to have access to the huge speculative opportunity in forex. Traders big and small have been growing in numbers and volume in order to take advantage of small fluctuations in exchange rates for the purpose of speculation and profit.
Forex is an exciting market that stands out from all others for a number of reasons:
- The most liquid of all Investment markets (over $4 trillion traded daily)
- Ability to trade anywhere, anytime via the internet
- Instant trade execution with minimum slippage
- 24-hour trading, 5.5 days a week. Sunday evening through Friday afternoon.
- The market cannot be cornered or manipulated by larger participants
- The ability to profit in rising and falling markets
- Flexible leverage and lot trading with low margin requirements
- Hedging option: you can hold long and short positions on the same currency