Every second, about $850 million changes hands in the foreign exchange (forex or FX) market, making it the world's largest financial marketplace, with daily trading volume reaching $7.5 trillion. While dealing in this massive market was once the exclusive domain of banks and financial institutions, online trading platforms have opened the door for individual investors to try their hand at currency trading.
Forex trading involves simultaneously buying one currency while selling another in hopes of profiting from changes in their relative values. For example, if you think the euro will strengthen against the U.S. dollar, you might buy euros and sell dollars, aiming to sell those euros later at a higher price. Thus, forex trading is about anticipating and capitalizing on these currency value shifts.
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 is the world's largest and most liquid asset market.
- 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.
- Market participants may use forex to hedge against international currency and interest rate risk, speculate on geopolitical events, and diversify portfolios, among other reasons.
The accessibility of online forex trading has a double edge—while it's opened prospects for everyday traders, it's also exposed some to risks they're not ready for. In addition, the market lingo comes fast at beginners and can quickly become overwhelming. That's why we've put together this detailed guide to help you start trading foreign currencies. We'll break down the essential concepts and guide you through the most critical steps, from choosing a broker and placing your first trade to developing a solid strategy and, most importantly, managing your risk.
What Is the Forex Market?
The foreign exchange market is where currencies are traded. Its most striking aspect is how it has no central marketplace. Instead, currency trading is done electronically over the counter (OTC). All transactions occur via computer networks that connect traders worldwide.
The main markets are open 24 hours a day, five days a week (from Sunday, 5 p.m. ET until Friday, 4 p.m. ET). Currencies are traded worldwide, but a lot of the action happens in the major financial centers. A 24-hour trading day begins in the Asia-Pacific region, then moves to major centers in Europe and then to North America, where it ends with the U.S. trading session. The forex market is highly dynamic no matter the time of day, with price quotes changing constantly.
How Does the Forex Market Work?
The FX market is one of two 24-hours-a-day (during weekdays) trading markets, the other being cryptocurrencies (though crypto markets don’t pause on weekends). Traditionally, the forex market was dominated by institutional firms and large banks, but its popularity among retail traders has significantly grown over the past decade. There's a caveat: Newer traders in the market have lured in fraudsters looking to take advantage of less knowledgeable investors.
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Where Is It?
The world forex markets have no physical buildings that serve as trading venues. Instead, markets operate via connected trading terminals and computer networks. Market participants are institutions, financial product banks, commercial banks, and retail investors worldwide.
Who Trades on It?
Currency trading used to be complicated for individual investors until it made its way onto the internet. Previously, most currency traders were large multinational corporations, hedge funds, or high-net-worth individuals. While commercial and investment banks still conduct much of the world's forex trading, there are also prospects for professional and individual investors to trade one currency against another.
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