Also 1s FX, the foreign exchange market is the global, decentralized, over-the-counter (OTC) marketplace for trading national currencies. It is the largest and most liquid financial market in the world, with a daily trading volume estimated at over $7.5 trillion.
Forex Characteristics
- Structure: A decentralized network of banks, financial institutions, and brokers. There is no central physical location.
- Trading Hours: Operates 24 hours a day, 5 days a week, following the sun across major financial hubs (Sydney, Tokyo, London, and New York).
- Liquidity: The high transaction volume ensures that most trades can be executed instantly with minimal price slippage.
- Leverage: Traders often use borrowed capital to control larger positions, which can amplify both profits and losses.
How Forex Trading Works
Currencies are always traded in pairs (e.g., EUR/USD). The value of the pair shows how many units of the quote currency are needed to purchase one unit of the base currency.
- Base Currency: The first currency listed (e.g., EUR in EUR/USD).
- Quote/Counter Currency: The second currency listed (e.g., USD in EUR/USD).
Forex Market Segments
| Segment | Description |
| Spot Market | The largest segment; involves the immediate exchange of currencies at the current market rate. |
| Forward Market | Private contracts to buy/sell a currency at a set price on a future date. |
| Futures Market | Standardized contracts traded on a central exchange (like the CME). |
| Swap Market | Simultaneous purchase and sale of identical amounts of one currency for two different value dates. |
Primary Forex Participants
- Central Banks: Influence currency values through interest rate adjustments and open-market interventions.
- Commercial/Investment Banks: The Interbank Market where the majority of volume occurs on behalf of clients or for speculation.
- Corporations: Use Forex to pay for goods/services in foreign countries and to hedge against currency risk.
- Retail Traders: Individual investors trading via online platforms for speculation.
Recently, the market has seen increased volatility driven by divergent monetary policies and the integration of AI in algorithmic trading, which now accounts for a significant portion of daily retail and institutional execution.
