Foreign exchange, or forex, is the market in which one currency is exchanged for another. It supports international trade, investment, travel, central-bank operations, and risk management. It is also actively traded by banks, asset managers, corporations, hedge funds, and individuals. Unlike a single stock exchange, the global FX market is a decentralised network of banks, dealers, electronic venues, brokers, and customers.
The Bank for International Settlements estimated average global foreign-exchange turnover at $7.5 trillion per day in April 2022. That figure covers several instruments and should not be read as the amount available at one price to every trader. Liquidity varies by currency pair, time of day, venue, order size, and market conditions.
How currency pairs work
Every FX quote compares two currencies. In EUR/USD, the euro is the base currency and the US dollar is the quote currency. A hypothetical quote of 1.1000 means one euro costs 1.10 US dollars. If EUR/USD rises, the euro has strengthened relative to the dollar, or the dollar has weakened relative to the euro. Both descriptions refer to the same relative move.
Pairs commonly described as majors combine the US dollar with heavily traded currencies, such as EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, or USD/CAD. Crosses exclude the dollar, as in EUR/GBP. Emerging-market and less frequently traded pairs are sometimes called exotic pairs. Labels vary among brokers, so they should not substitute for checking actual liquidity and contract terms.
FX conventions are not perfectly uniform. Most currencies are quoted as units of quote currency per unit of base currency, but market terminology, decimal places, and settlement conventions differ. USD/JPY, for example, is generally quoted with fewer decimal places than EUR/USD. Traders should confirm a platform’s pip definition and minimum price increment rather than assume they are identical everywhere.
Bid, ask, and the spread
A two-way FX quote has a bid and an ask. The bid is the price at which the dealer or market will buy the base currency; the ask is the price at which it will sell it. The difference is the bid-ask spread. If EUR/USD is quoted at 1.1000/1.1002, the spread is 0.0002, commonly described as two pips for that pair.
The spread is an immediate trading cost, but not the only one. A broker may also charge commission, add a markup, apply overnight financing, or impose conversion and withdrawal fees. Slippage can make the executed price worse or better than the displayed quote when prices move or available depth is limited. A narrow advertised minimum spread therefore does not establish the total cost of trading.
Spreads tend to be tighter in liquid pairs during active hours and wider around market openings, holidays, major data releases, or sudden news. There is no guarantee that a stop order will execute at its trigger price. It normally becomes an order for execution after the trigger is reached, and a gap can produce a materially different fill.
Spot FX is not one single retail product
In the wholesale market, a spot FX transaction is an agreement to exchange two currencies, typically settling according to the pair’s market convention. Corporations may use spot transactions to make payments, while institutional traders may use spot alongside forwards, swaps, and options.
Many retail platforms offer a different economic arrangement. A rolling spot contract, margin FX product, or contract for difference may provide leveraged exposure to a currency pair without the customer taking delivery of the currencies. The provider may be the counterparty, and positions may be rolled daily with financing adjustments. Legal classification and consumer protections depend on the jurisdiction.
This distinction affects ownership, settlement, counterparty exposure, leverage limits, tax treatment, disclosures, and insolvency protections. A platform displaying EUR/USD does not, by itself, reveal whether the customer is entering deliverable spot FX, a rolling spot transaction, a CFD, a futures contract, or another derivative. The product disclosure and client agreement do.
Forex market sessions
FX trading follows the business day around the world, often described through Sydney, Tokyo, London, and New York sessions. The market is commonly available from late Sunday to late Friday in US time zones, but it is not literally open without interruption everywhere. Individual platforms have maintenance windows, holiday schedules, and different weekly opening and closing times.
Session labels are useful because participation changes through the day. Asian hours often concentrate activity in yen, Australian dollar, and New Zealand dollar pairs. London is a major centre for global FX dealing. The London-New York overlap generally brings substantial activity in euro, sterling, and dollar pairs. These are tendencies, not guarantees of volume or direction.
Daylight-saving changes complicate session clocks. The United States, United Kingdom, Europe, Australia, and other regions do not always change clocks on the same date. Traders should use Coordinated Universal Time or an economic calendar that adjusts correctly, especially when timing central-bank decisions and data releases.
Who trades forex and why
- Companies convert receipts and hedge future payments in foreign currencies.
- Asset managers manage currency exposure created by international investments.
- Banks and dealers facilitate customer flow, manage inventory, and trade with one another.
- Central banks implement monetary policy, manage reserves, and may intervene under specific mandates.
- Speculators take directional or relative-value positions and accept the risk of loss.
The reasons matter because not every transaction expresses a price forecast. A European company buying dollars to pay an invoice can create demand for USD even if it has no view on the future exchange rate. Hedging, rebalancing, and option-related flows can also move prices temporarily.
What beginners should verify
Before funding an account, identify the regulated legal entity, the product type, where client money is held, and what happens if the provider fails. Compare typical spreads during the intended trading hours, commissions, overnight charges, margin rules, and order-execution policy. Confirm whether negative-balance protection applies and whether it has exceptions.
Leverage magnifies both gains and losses. A small deposit can control a much larger notional position, making an ordinary exchange-rate move significant relative to account equity. Education should therefore begin with product mechanics and loss limits, not with promised returns. No session, pair, or strategy removes market, liquidity, execution, or counterparty risk.