Forex Overview

Forex (which is also known as the “Foreign Exchange Market,” “currency,” or “FX”) is the market where one currency is traded for another. When a currency is traded, the transaction is carried out on the Foreign Exchange market (also referred to as the Forex or FX market). The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion (in April 2004 according to the BIS study) changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.4296 dollar.

Unlike other financial markets that operate at a centralized location (i.e., the stock exchange), the worldwide Forex market does not have a central location. It is a global electronic network of banks, financial institutions and individual Forex traders, all involved in the buying and selling of national currencies. A major feature of the Forex market is that it operates 24 hours a day, corresponding to the opening and closing of financial centers in countries all across the world. At any time, in any location, there are buyers and sellers, making the Forex market the most liquid market in the world.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4296 a pip would be the '6' at the end. So the bid/ask quote of EUR/USD might be 1.4296/1.4298.