A:

The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank for International Settlements, the average daily trading volume reached $1.9 trillion in 2004. This huge trading volume provides the forex market with excellent liquidity, which benefits the large number of traders that invest there. The growth of the forex market has been spurred by the development of electronic trading networks and the increase in globalization.

Specifically, the forex market focuses on the trade of currencies by both large investment banks and individuals around the world. All trading is done over-the-counter, which adds to the market's liquidity, allowing trades to be made 24 hours a day. Trading can be done in nearly all currencies, however, a small group known as the 'majors' is used in most trades. These currencies are the U.S. dollar, the euro, the British pound, the Japanese yen, the Swiss franc, the Canadian dollar and the Australian dollar. All currencies are quoted in currency pairs.

When a trade is made in forex, it has two sides - someone is buying one currency in the pair, while another individual is selling the other. Although the positions traded in forex are often in excess of 100,000 currency units, only a fraction of the total position comes from the investor. The remainder is provided by a broker, which offers the leverage needed to make the trade.

Traders look to make a profit by betting that a currency's value will either appreciate or depreciate against another currency. For example, assume that you purchase US$100,000 by selling 80,000 euros. In this case, you are betting that the value of the dollar will increase against the euro. If your bet is correct and the value of the dollar increases, you will make a profit. In order to collect this profit, you will have to close your position. To do this, you must sell the US$100,000, in which case you will receive more than 80,000 euros in return.

Traders are not required to settle their positions on the delivery date, which usually arises two business days after the position is opened. Traders can roll over their positions to the next available delivery date. However, if a trader takes this route, he or she is left open to incurring a charge that can arise depending on his or her position and the difference between the interest rates on the two currencies in the pair.

To learn more, see A Primer On The Forex Market, Getting Started In Forex and Wading Into The Currency Market.

RELATED FAQS
  1. Can I trade a currency when its main market is closed?

    In the forex market, currencies from all over the world can be traded at all times of the day. The forex market is very liquid, ... Read Answer >>
  2. In the forex market, how is the closing price of a currency pair determined?

    The foreign exchange market, or forex, is the market in which the currencies of the world are traded by governments, banks, ... Read Answer >>
  3. How is the value of a pip determined?

    Learn how the pip is used in the pricing of a currency pair in forex trading, and see how the foreign exchange market is ... Read Answer >>
  4. What does rollover mean in the context of the forex market?

    In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency ... Read Answer >>
  5. What are the most common currency pairs traded in the forex market?

    There are many official currencies that are used all over the world, but there only a handful of currencies that are traded ... Read Answer >>
  6. How is spread calculated when trading in the forex market?

    First, remember that in the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms ... Read Answer >>
Related Articles
  1. Trading

    Forex Broker Guide

    A Guide To Choosing a Forex Broker
  2. Trading

    Can Forex Trading Make You Rich?

    Forex trading may be profitable for hedge funds or unusually skilled currency traders, but for average retail traders, forex trading can lead to huge losses.
  3. Trading

    The 6 Most-Traded Currencies And Why They're So Popular

    Every currency has specific features that affect its underlying value and price movements in the forex market.
  4. Trading

    Top 5 Forex Risks Traders Should Consider

    With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Here are the top 5 forex risks to avoid.
  5. Trading

    Working In Finance: 5 Forex Careers

    The forex markets can be both exciting and lucrative. Find out what jobs exist in this space and how to get them.
  6. Trading

    Understanding Forex Quotes

    When trading in forex, all currencies are quoted in pairs. Find out how to read these pairs and what it means when you buy and sell them.
  7. Trading

    8 Basic Forex Market Concepts

    We go over some of the things you need to understand before you can trade currencies.
RELATED TERMS
  1. Forex Spot Rate

    The current exchange rate at which a currency pair can be bought ...
  2. Real Time Forex Trading

    A form of speculation in which a trader bets on the movement ...
  3. Forex Market Hours

    The hours during which forex market participants are able to ...
  4. Forex Scalping

    A trading strategy used by forex traders to buy a currency pair ...
  5. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  6. International Currency Markets

    The market in which participants from around the world are able ...
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  3. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  4. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  5. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  6. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
Trading Center