What Is Forex? The Very Basics Of Forex Markets

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The FOREX (currency) market is the biggest and the most liquid financial market in the world. Its name comes from FOReign EXchange and it’s actually the place where people and institutions from all around the world exchange currencies. It’s so big that more than the worth of $5 000 000 000 000 (5 trillion US dollars) are traded every single day there. This number is huge, having in mind that all the services and goods traded in the United States for a year are around $17 trillion. Just for a little more than 3 days the FOREX market beats the turnover all US companies and people make, buying all kind of stuff for a whole year.

The currency market is actually the place where the market value of all traded currencies is determined by the trades happening there. If the US dollar (USD) isĀ  exchanged for 120 JPY (Japanese Yen) at the moment, this means that the price of the dollar is exactly 120 yen. If someone buys dollars at 120.10 yen, this changes the world price of the dollar against the yen to 120.10 . Every single deal on the market determines the current world price of a currency. And because there are hundreds of thousands of deals every single day, the price of a currency constantly changes, sometime several times per second.

The forex market is international and it’s highly decentralized and unregulated. There is no special institution responsible for the trades there. It works 24 hours a day during the work week and it’s closed on Saturday and Sunday.

The FOREX market is decentralized which means that there is no central institution (like the SEC) regulating it. The market constitutes from all the banks and financial institutions exchanging currencies on it. This is why the forex market has no physical location.

How to trade on FOREX?

Practically only banks and other financial institutions have a direct access to the forex market. If you want to trade there you must apply for a forex trading account with a financial broker. Have in mind, that not all brokers offer direct access to the market. The so called retail forex brokers don’t even execute your currency trades, they just register the buy and sell prices of your positions and this way calculate your profit/loss from the position. If you want to be able to really trade on the foreign exchange, you have to explicitly find a broker that offers this and prepare a relatively larger amount of money for this. If you just want to speculate, the retail forex broker are OK enough for this purpose.

The forex market is the perfect market

There are so big volumes on the forex market, there are so many participants there who have equal access to information, that the forex market is the closest to the so called perfect market, or perfect competition.

How are currencies traded?

A chart representing currencies by volume on the forex market.

A chart representing currencies by volume on the forex market.