What is Forex?
Foreign Exchange describes the purchase of a particular currency from an individual or institution and the simultaneous sell of another currency at the equivalent value or current exchange rate. Essentially, the process of exchanging one currency for another is a simple trade based on the current rates of the two currencies involved.
At the core level of the world’s need for money exchange is the international traveler. When traveling from the US to England, for example, you will of course need the local currency to pay for transportation, food, and so on. Upon arrival at the airport you will surrender (sell) your US Dollars in order to receive (buy) the equivalent in British Pounds. In this example, you sold the USD and bought the GBP, conversely the foreign exchange counter bought the USD and sold the GBP. The prices at which you buy and sell currencies at are known as exchange rates. This rate or price fluctuates based on demand, political, and economic events surrounding each country’s currency.
The example above illustrates foreign currency trading in basic terms as it relates to world travelers. However, the market is also utilized globally by each country's central bank (i.e., America's Federal Reserve), investment and commercial banks, fund management firms (mutual funds and hedge funds), major corporations, and individual investors or speculators. Depending on the timing of such transactions, purchasing a currency with the intent of later selling it at a better exchange rate (and vice versa) can potentially yield profits for investors, of course there is a strong potential for loss trading currencies as well.
Utilization by so many parties is why the Foreign Exchange market is the world's largest financial market, with a daily dollar volume exceeding $1.9 trillion ($1,900,000,000,000). This mind boggling volume is probably what led you to research the topic.
Now let's put the market's trading volume in perspective. In 2003 the reported trading volume for the NYSE (New York Stock Exchange) was a mere $9.6 trillion; the previous year was just above that at $10.2 trillion. These seem like respectable figures, but in comparison to the Foreign Exchange Market, which is commonly trading $1.9 trillion in a single day, these numbers pale in comparison. This is probably why so many fund managers and Fortune 500 companies invest heavily in this highly liquid market. The high volume of this market makes it one of the riskiest markets to trade in.
It is important to note that retail traders, such as yourself, will most likely be accessing the off-exchange foreign currency market (or Forex market) via an FCM (Futures Commissions Merchant) or broker. You will not be trading in the actual Interbank market itself. Your access to the total market will be determined by your chosen broker’s limitations. FCMs or brokers act as a bridge between you and their liquidity partner (sometimes larger global banks) that you would otherwise not have sufficient capital to do business with. The large majority of off-exchange retail foreign currency brokers act as market makers, meaning that by keeping many trades in house they create their own liquidity. Some retail brokers clear trades directly through to the larger banks that provide their liquidity. If you are new to the Forex market it would wise to research and understand your broker’s particular business model and method of clearing trades.
Unlike other financial markets, the Forex market operates 24 hours a day, 5.5 days a week (6:00 PM EST on Sunday until 4:00 PM EST on Friday). Through an electronic network of banks, corporations and individual traders exchange currencies, though as the market is primarily used as a means for speculative investing, actual physical delivery of currencies is almost never intended. Forex trading begins every day in Sydney, moves to Tokyo, followed by Europe and finally the Americas.
