Foreign exchange (forex) trading is the process of buying one currency and selling another with the goal of making a profit from the trade. Forex (FX) is a portmanteau of the words foreign and exchange. According to a 2022 triennial report from the Bank for International Settlements (a global bank for national central banks), the daily global volume for forex trading reached $7.5 trillion in 2022.1
Bank for International Settlements. “OTC Foreign Exchange Turnover in April 2022,” Page 1.
Read on to learn about the forex markets, how they work, and how to start trading with one of the best forex brokers.
KEY TAKEAWAYS
- The foreign exchange (forex or FX) market is a global marketplace for exchanging national currencies.
- Because of the worldwide reach of trade, commerce, and finance, forex markets tend to be the world’s largest and most liquid asset markets.
- Currencies trade against each other as exchange rate pairs. For example, EUR/USD is a currency pair for trading the euro against the U.S. dollar.
- Forex markets exist as spot (cash) and derivatives markets, offering forwards, futures, options, and currency swaps.
- Some market participants use forex to hedge against international currency and interest rate risk, speculate on geopolitical events, and diversify portfolios, among other reasons.
What Is the Forex Market?
The foreign exchange market is where currencies are traded. This international market’s most unique aspect is that it lacks a central marketplace. Instead, currency trading is conducted electronically over the counter (OTC). This means that all transactions occur via computer networks among traders worldwide rather than on one centralized exchange.
The market is open 24 hours a day, five and a half days a week. Currencies are traded worldwide in the major financial centers of Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich—across almost every time zone. This means the forex market begins in Tokyo and Hong Kong when the U.S. trading day ends. The forex market can be highly active at any time, with price quotes changing constantly.
