The foreign exchange (also known as Forex or FX) market is a global marketplace for exchanging national currencies against one another (changing one currency into another currency). Forex trading involves the buying and selling of currencies on this foreign exchange market. It is the world’s most traded financial market with transactions worth trillions of dollars taking place every day.
While a lot of foreign exchange is done for practical purposes, such as exchanging currencies when travelling abroad, the vast majority of currency conversion is undertaken with the aim of earning a profit.
One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centres of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.
Since Forex trading always involves selling one currency in order to buy another, currencies trade against each other as exchange rate pairs (e.g. EUR/USD).
A base currency is the one you’re buying (first currency listed in a Forex pair) when you trade a Forex pair, while the second currency is the one you’re selling and is called the quote currency.
What Are The Benefits Of Forex Trading?
- Forex market is the world’s largest in terms of daily trading volume so offers the most liquidity.
- Trades 24 hours a day 5 days a week.
- Good for beginners
- Low transaction costs
- Benefit from leverage
- Volatile markets
- Potential for fast returns
- No restrictions on directional trading*
*This means that if you think a currency pair is going to increase in value, you can buy it (‘go long’), and if you think it is going to decrease in value, you can sell it (‘go short’).