The foreign exchange market — usually called forex or FX — is where currencies are bought, sold and exchanged. It’s a global, decentralized market that runs around the clock during weekdays and moves enormous sums: trillions of dollars change hands every business day. Forex exists to let people and institutions convert one currency into another for trade, investment, hedging and speculation. Because currencies are always priced relative to one another, the market tells you how much of currency B you can buy with one unit of currency A.
How the market is organised
Unlike a stock exchange with a single central venue, forex is an over‑the‑counter (OTC) market. Trading happens through a network of banks, brokers, electronic platforms and other counterparties across time zones. There are several layers to the market. At the top is the interbank market, where large commercial banks and dealers trade with each other. Below that are smaller banks, multinational corporations, hedge funds, asset managers and retail brokers that connect individual traders to liquidity providers.
Currencies trade in pairs. Each quote shows two currencies — the base currency and the quote (or counter) currency — and a price that tells you how much of the quote currency buys one unit of the base. For example, if EUR/USD is 1.08, one euro buys 1.08 US dollars. Every pair has a bid price (what the market will buy at) and an ask price (what the market will sell at); the difference is the spread, one of the main transaction costs.
There are different markets within FX:
- The spot market is the immediate exchange of currency at the current price (settlement is typically two business days).
- The forward and swap markets let participants agree today on exchange rates for future dates to manage risk.
- Futures and options are exchange‑traded derivatives that offer standardized contracts and are cleared through exchanges.
Who trades and why
The forex market serves many needs. Multinational companies use FX to pay suppliers and manage currency exposure. Banks and asset managers convert funds for investment and liquidity. Central banks may intervene to influence a currency’s level. And traders—both professional and retail—speculate on currency moves.
There are three broad reasons people trade FX. Corporations trade to settle international business and to hedge: for example, an exporter who will receive euros in three months might lock in a dollar price with a forward contract. Investors and funds trade for portfolio reasons or to exploit interest rate differences. Speculators trade to profit from expected moves; their activity is a major driver of daily turnover and intraday volatility.
When the market trades and why liquidity matters
Forex operates 24 hours a day, five days a week. Trading starts in Asia, moves to Europe and finishes in North America — and then the cycle repeats. Liquidity is not uniform across the day or across currency pairs: major pairs like EUR/USD, USD/JPY and GBP/USD are typically most liquid when the European and US sessions overlap. Less liquid hours or pairs can mean wider spreads and larger price moves for a given trade size.
Liquidity matters because it affects how easily you can enter or exit a position and how much the market price moves when you trade. During thin moments or stressed market conditions, liquidity can evaporate and price moves accelerate — events sometimes called flash crashes.
Concrete examples — spot trade and a hedge
Spot example: suppose EUR/USD = 1.08 and you want to buy 1,000 EUR. You pay 1,080 USD (1,000 × 1.08). If the rate later moves to 1.10 and you sell your euros, you would receive 1,100 USD and make 20 USD (ignoring costs). If instead the rate went to 1.06 you would get 1,060 USD and lose 20 USD.
Forward/hedge example: a US importer expects to pay a supplier €100,000 in six months. To avoid the risk that EUR/USD rises (making euros more expensive in dollars), the importer can lock in a rate with a forward contract so that the dollar cost is known today. The forward price reflects the interest rate difference between the two currencies as well as market expectations.
Costs, leverage and execution
The visible cost of trading is the spread between bid and ask. Brokers and platforms also charge commissions, overnight financing (rollover) for leveraged positions, and there can be slippage when market prices move between order placement and execution.
Leverage is common in retail FX: brokers let traders control large notional amounts with a small deposit (margin). Leverage magnifies both gains and losses. For example, with 50:1 leverage, a 2% adverse move wipes out 100% of a trader’s margin. That is why margin requirements, position sizing and stop‑loss discipline are critical.
Execution venues vary: some traders use market makers (brokers that quote prices and take the other side), others use electronic platforms that aggregate multiple liquidity providers. Platform choice can affect execution quality, latency and the likelihood of seeing firm (guaranteed) prices versus “last look” quotes where a price check may still be applied before a trade is accepted.
Market behaviour and special features
The FX market is sensitive to macroeconomic news — interest rates, inflation, employment and trade figures — as well as to central bank announcements. Central bank actions or even hints of intervention can move currencies sharply. The market is also affected by large institutional flows, hedge fund strategies, and algorithmic trading.
There are special considerations in FX: benchmark fixing windows (for example, a daily fix used to value assets) can concentrate trading and create unusual price patterns; settlement risk used to be a major issue before the introduction of payment‑versus‑payment systems that reduce the chance of one side paying while the other does not.
Risks and caveats
Trading forex carries real risk and is not suitable for everyone. Currencies can be volatile, and leverage magnifies losses as well as gains. Slippage, gaps (price jumps between sessions), platform outages and illiquid market conditions can result in orders executing at much worse prices than expected. Counterparty and operational risks exist, especially with unregulated brokers or over complex products. Central bank intervention, geopolitical shocks, and sudden shifts in global risk sentiment can produce sharp moves that stop‑loss orders may not fully protect against.
Regulation and protections vary by country and provider; retail traders should check the regulatory status of any firm they use, understand margin requirements and read the terms and costs carefully. This article is educational and not personalised advice — if you’re unsure about trading, seek independent financial advice.
Key takeaways
- The forex market is the global, decentralized market for exchanging currencies; it runs 24 hours a day, five days a week, and is the largest financial market by daily volume.
- Currencies trade in pairs; prices have bid and ask components and spreads are a core cost to consider when trading.
- Traders participate for hedging, commercial settlement and speculation; leverage is common but amplifies risk.
- Trading carries significant risks — including volatility, leverage, liquidity and counterparty risk — and this content is educational, not personalized financial advice.
References
- https://www.sciencedirect.com/topics/economics-econometrics-and-finance/foreign-exchange-market
- https://www.investopedia.com/terms/forex/f/forex-market.asp
- https://en.wikipedia.org/wiki/Foreign_exchange_market
- https://www.bis.org/publ/work1094.pdf
- https://www.ig.com/en-ch/learn-to-trade/ig-academy/a-beginners-guide-to-forex-trading/the-history-of-forex
- https://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp
- https://business.bofa.com/en-us/content/what-is-forex-trading-and-how-does-it-work.html