What Exactly is the Foreign Exchange Market?

More commonly known as forex, or the FX market, the Foreign Exchange Market is the largest financial market in the world. It has an average daily turnover of well over $1 trillion U.S. dollars. That's 30 times bigger than all of the U.S. equity markets combined volume.

In the Foreign Exchange Market the buying of one currency and selling of another is done simultaneously. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two main reasons to buy and sell currencies. Approximately 5% of the daily turnover is from companies and governments that buy or sell products and services in a foreign country or companies that must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

If you are a speculator, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called the Majors. The Majors include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. Today, more than 85% of all daily transactions involve trading of the Majors.

The foreign exchange market is a true 24-hour market. Trading begins each day in Sydney and moves around the world as the business day begins in each financial center; first to Tokyo, then London and on to New York. Unique to the Forex Exchange market is the opportunity for investors to respond to currency fluctuations caused by economic, social and political events when they occur, whether it be day or night.

The Foreign Exchange market is considered an Over The Counter (OTC) or Interbank market because transactions are conducted between two counterparts by telephone or through an electronic network. Forex trading is not centralized on an exchange like the stock and futures markets are.