What is forex?

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What is forex?

If you've ever gone on holiday and exchanged say, pounds for euros, then you've joined in the forex market. Simply put:

Forex is how individuals and businesses convert one currency to another.

Forex

Forex, also known as foreignexchange, FX or the currency market, is the largest financial market in theworld. On average over $5 trillion worth of transactions take place every day.That's around 100 times more than the New York Stock Exchange (NYSE) - theworld's biggest stock exchange.

As well as being traded byindividuals and businesses, forex is also important for financial institutions,central banks, and governments. It facilitates international trade andinvestment by allowing companies that earn money in one currency to pay forgoods and services in another.

Who trades forex?

There are a huge number of marketparticipants looking to trade forex at any particular time, from individualspeculators wanting to turn a quick profit, to central banks trying to controlthe amount of currency in circulation.

However, by far the mostsignificant players in the forex market are the major international banks.Between them, Citigroup, Deutsche Bank, Barclays, JPMorgan and UBS account foraround 50% of global forex trade.

Euromoney FX Survey

Why do people trade forex?

Individuals and businessesparticipate in the forex market for two main reasons:

Speculation

The vast majority of forextransactions are made simply to make money. This means the person orinstitution making the trade has no plans to take delivery of the currency,they are just looking to turn a profit on movements in the market.

With major financial institutionsalways looking to profit from small changes in forex prices, many large tradescan occur throughout the day. This activity means currency rates are some ofthe most consistently volatile financial markets in the world - which in turnprovides more opportunity for speculators to make money.

Purchasing goods or services inanother currency

Every time a transaction is madebetween two entities in different regions, a foreign exchange transaction needsto take place to pay for the goods or services exchanged. Transactions such asthis happen globally, every second of every day.

Despite the number oftransactions, the amount of currency traded is often very small compared totrades made by large speculators. Therefore commercial trading tends not tohave such a big effect on short-term market rates.

How do you trade forex?

Unlike share trading, forex is an over-the-counter (OTC) market. This means that currencies are exchanged directly between two parties rather than through an exchange.

The forex market is run electronically via a global network of banks - it has no central location, and trades can take place anywhere via a forex broker of your choice. This also means that you can trade forex at any time, so long as it's during Trading hours in any one of the four major forex trading centres (London, New York, Sydney and Tokyo).

Forex trading hours: April-October (UK time)

Forex Trading Hours

In practice, that means you can trade most forex pairs from around 21:00 or 22:00 (UK time) on Sunday to 21:00 or 22:00 (UK time) on Friday, every week. The exact times can vary due To daylight saving time changes in the UK, USA and Australia.

How does a forex trade work?

Forex prices are always quoted in pairs such as AUD/EUR, which stands for the Australian dollar versus the euro. This is because if you want to purchase Australian dollars you need to buy them with another currency, like euros.

When trading forex you are simultaneous BUYING one currency while SELLING another.

Lesson summary

Forex is how individuals and businesses convert one currency to another

The main players in the market are major international banks

Speculation accounts for the vast majority of transactions

It's an over-the-counter (OTC) market, where trades take place directly between two parties rather than through an exchange

Forex is traded in pairs - you are simultaneous buying one currency while selling another

The first currency in every pair is the base or primary currency. The second is the quote or counter currency

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