{"id":121049,"date":"2023-11-08T14:13:31","date_gmt":"2023-11-08T14:13:31","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&p=121049"},"modified":"2023-11-08T14:13:31","modified_gmt":"2023-11-08T14:13:31","slug":"forex-fx","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/forex-fx","title":{"rendered":"Forex (FX)"},"content":{"rendered":"

What is Forex (FX)?<\/span><\/h2>\n

Forex – or the foreign exchange market, FX –  is a decentralized market trading currency pairs and derivatives. Investors and traders try to profit through fluctuations in exchange rates. Although other markets may yield more profit margins than forex trading, it is still one of the most popular markets in the world.<\/p>\n

Currency pairs are valued based on how many units of one currency are needed to buy one unit of another currency. Larger investment banks, smaller mid-level banks, dealers, and insurance companies are some of the players in the forex market.<\/p>\n

With increased globalization in the last few decades, forex trading has become invaluable. It allows businesses, individuals, and governments to trade and establish themselves across borders.<\/p>\n

Forex Markets Explained<\/h3>\n

The forex market allows participants such as traders, individuals, investment management companies, banks, and hedge funds to trade foreign exchange.<\/p>\n

The forex market remains open 24 hours a day, 5 days a week, with the exception of holidays. This is primarily because forex exchanges in North America, Europe, Asia, and Australia have varying opening hours, which often coincide. Each trading day commences with the Australian and Asian markets, followed by the European markets and, ultimately, the North American markets.<\/p>\n

It’s worth noting that the forex market operates on several holidays when traditional stock markets are not active, even though the level of trading activity may be reduced.<\/p>\n

London is currently the largest forex hub, with several forex brokers having offices in the city. In 2022, it saw around $7 trillion in daily trades, coming up to 38.1% of global forex activity.<\/p>\n

In terms of currencies, the US dollar, euro, and Japanese yen are the most traded ones.<\/p>\n

When it comes to traders, JPMorgan Chase, UBS, and XTX Markets are some of the biggest.<\/p>\n

The Commodity Futures Trading Commission<\/a> (CFTC) oversees forex markets in the US, whereas the Financial Conduct Authority<\/a> (FCA) regulates it in the UK.<\/p>\n

Levels of the Forex Market<\/span><\/h2>\n

Instead of one exchange, the market is made up of a vast network of computers and brokers. It is divided into two tiers:<\/p>\n

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  1.  The Interbank Market<\/strong>: This is for big banks and large financial institutions to trade currency derivatives and currencies for themselves or on behalf of their clients This may be for hedging or to fix their own exchange rates, amongst other purposes.<\/li>\n
  2.  The Over-the-Counter (OTC) Market<\/strong>: This is for individuals, where brokers and online platforms facilitate trade.<\/li>\n<\/ol>\n

    3 Main Types of the FX Market<\/h3>\n

    Spot Forex Market: <\/strong>The spot market entails the exchange of currency between the buyer and seller right at the time of the trade. This is done at the present exchange rate. Hence, this is often the simplest and, as such, the largest forex market. Dealers, commercial banks, brokers, investment banks, and several other participants are all involved in spot markets.<\/p>\n

    Forward Forex Market: <\/strong>Two enter into an agreement to trade a set number of units of a currency at a given price sometime in the future.<\/p>\n

    Futures Forex Market: <\/strong>Forex futures are almost the same as forwards, however, they are traded on centralized exchanges<\/a>. This goes a long way in making them quite a bit more liquid, safer, and more regulated than forwards.<\/p>\n

    Forex Brokers<\/span><\/h2>\n

    Forex brokers can come in a variety of types. They are essentially middlemen and can be individuals, large financial services companies, or online brokers. The main duty of a broker is to match forex buyers with sellers of the particular quantity of currency that is required.<\/p>\n

    This may be tricky sometimes, as most of the players in the forex market can trade on a very large scale, such as huge banks. As such, they may not be appropriate matches for smaller or more infrequent traders.<\/p>\n

    Forex brokers can help clients make trades while also trying to keep losses to a manageable or affordable amount. As with brokers, their clients can also range from larger institutional ones to individuals operating on a much smaller scale.<\/p>\n

    These services are provided for a commission. Nowadays, online brokers are further opening up access to the market.<\/p>\n

    They provide a range of other facilities, such as free demo accounts, technical analysis tools, real-time price alerts, and learning courses.<\/p>\n

    Some of the biggest online forex brokers<\/a> are eToro<\/a>, Capital.com<\/a>, XTB<\/a>, Trade Nation<\/a>, <\/strong><\/em>Admirals<\/a>.<\/strong><\/em><\/p>\n

    Examples of Currency Pairs<\/span><\/h2>\n

    Forex is always traded in currency pairs. The currency on the left is the base currency, while the currency on the right is the quote currency.<\/p>\n

    Each currency pair has a relative value already given to it, which is subject to market conditions and investor sentiment.<\/p>\n

    The currency pair represents how many units of the quote currency it will take to buy one unit of the base currency. Hence, if the EUR\/USD pair is trading at 1.06 today, that means that it will take $1.06 to buy CAD 1 today.<\/p>\n

    Forex pairs can be further categorized into major, minor, and exotic pairs.<\/p>\n

    Major Pairs<\/h3>\n

    There are typically four major pairs which include:<\/p>\n