What Is Forex?

Forex, short for foreign exchange and also called FX, is the market where one currency is exchanged for another. Every time a company pays a foreign supplier, a tourist changes money or a fund buys foreign shares, currencies change hands. It is the largest financial market in the world: the Bank for International Settlements' 2022 survey put average turnover at about $7.5 trillion a day.

How currencies are quoted#

Currencies always trade in pairs, because you are buying one by selling another. A quote such as EUR/USD 1.0850 means one euro costs 1.0850 US dollars.

• The first currency is the base currency, here the euro.
• The second is the quote currency, here the dollar.
• If you buy EUR/USD, you buy euros and sell dollars, betting the euro will rise against the dollar.

Price changes in forex are measured in pips, usually the fourth decimal place, so that move was 50 pips. See Pips and Pipettes. Trade sizes are measured in lots; a standard lot is 100,000 units of the base currency. See Lots: Standard, Mini and Micro.

The main currency pairs#

More detail is in Currency Pairs: Majors, Minors and Exotics.

Who trades forex#

• Banks and dealers make markets and handle most volume.
• Companies exchange currencies for trade and hedge future payments.
• Central banks manage reserves and sometimes intervene to influence their currency.
• Funds trade currencies for returns or to hedge foreign investments.
• Retail traders speculate through brokers, a small but visible share of the market.

How the market works#

Forex has no single central exchange. It is an over the counter market: banks, brokers and electronic platforms around the world quote prices to each other and to clients. Because financial centres in different time zones take turns being open, the market runs 24 hours a day from Sunday evening to Friday evening, US time. Activity peaks when London and New York are both open. See Forex Trading Sessions.

What moves exchange rates#

1. Interest rates. Higher rates tend to attract money into a currency. Expectations about central bank decisions move currencies more than almost anything else. See Interest Rate Differentials.
2. Economic data. Inflation, employment and growth figures change rate expectations.
3. Risk sentiment. In fearful markets, money often flows to the US dollar, Japanese yen and Swiss franc.
4. Trade and capital flows. Large export surpluses or foreign investment create steady demand for a currency.
5. Politics and policy. Elections, sanctions and intervention.

Risks for forex traders#

• Leverage. Retail forex accounts commonly offer leverage of 30:1 or more, and offshore brokers far higher. Small moves create large gains or losses. See Leverage and Margin in Forex.
• Gaps and news spikes. Rates can jump on data releases or surprise central bank moves, skipping past stop orders.
• Broker risk. Because the market is over the counter, the choice of a well regulated broker matters. See How to Choose a Broker.
• Overnight costs. Holding a position past the daily rollover usually incurs or earns a swap based on the two currencies' interest rates. See Rollover and Swap in Forex.

Frequently asked questions#

Is forex trading legal?#

In most countries yes, through regulated brokers. Rules on leverage and which brokers may serve residents differ by country.

How much money do I need to trade forex?#

Many brokers allow small accounts and micro lots of 1,000 units, so a trader can start small. Position size should still follow your risk rules, not the leverage offered.

Why is forex so popular with retail traders?#

It trades around the clock, major pairs have tight spreads and brokers offer small position sizes and high leverage. The leverage is also why many retail forex traders lose money.

Next, see how retail traders actually trade currencies in Forex Trading.

Sources#

• Bank for International Settlements, Triennial Central Bank Survey
• Wikipedia, Foreign exchange market