The foreign exchange market known as “forex” for short is the market in which currencies or sovereign money of different nations is traded. The forex market allows you to buy and sell these currencies at constantly varying rates, in an attempt to make a profit by exploiting the difference between these constantly varying prices. It is the biggest financial market in the world, with over $5 trillion worth of transactions occurring daily.
In this market, trade is conducted by transacting in currency based instruments, each of which has its unique characteristics (see below), though all these products are inherently based on the same underlying currencies. The forex market is open 24 hours a day, 5 days a week and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Sydney, Singapore, Hong Kong and Paris.
Forex is considered a truly global market, with many different currencies/currency pairs to trade in. Therefore, there is no one main marketplace where all currency trading is conducted. Rather, currency trading occurs electronically over the counter, over closed interbank dealer networks, as well as financial exchanges, located all over the world. This means transactions occur via multiple, and often interconnected networks, between investors from all over the world.
Currency pairs is the term used to express one currency against another in terms of a rate of exchange between the two currencies. Currencies are always transacted in terms of an exchange rate. The buying and selling prices for a currency pair (the “Bid” and “Ask”) represent the rate at which one currency can be bought or sold in exchange for the other currency in the pair.
Each currency is recognized by a three-letter code and currency pairs are named by combining the three-letter codes of two currencies. For example, EUR is the EURO and refers to the currency of the European Union. There are 8 world leading currencies which are:
AUD (Australian Dollar)
CAD (Canadian Dollar)
CHF (Swiss Franc)
GBP (British Pound)
JPY (Japanese Yen)
NZD (New Zealand Dollar)
USD (United States Dollar)
There are actually three major ways that institutions, corporations and individuals transact in the currency market: The spot market, the futures/forwards market and the options market. Currency trading in the spot market always has been and continues to hold the largest market share in terms of trading volumes in the currency trading market.
The spot market is where currencies are bought and sold according to the current/cash/spot price. Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency, at a specific price per unit, at a pre-destined future date of settlement. Forwards and futures markets are based on the cash market value of the currency as a starting point of reference.