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. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ... 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. 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 >>
  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. How does the foreign-exchange market trade 24 hours a day?

    The forex market is the largest financial market in the world, trading around $1.5 trillion each day. Trading in the forex ... Read Answer >>
  6. What methods can be used to fund a forex account?

    The forex market is where currencies from around the world are traded. In the past, currency trading was limited to certain ... Read Answer >>
Related Articles
  1. Trading

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  2. Trading

    Forex Broker Guide

    A Guide To Choosing a Forex Broker
  3. Trading

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
  4. Trading

    Forex or Stock Trading: Which Works For You?

    Even though the odds favor stock trading, forex trading has several advantages to offer a particular type of investor.
  5. 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.
  6. 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.
  7. Trading

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  8. Trading

    Forex Trading: A Beginner’s Guide

    As businesses continue to expand to markets all over the globe, the need to complete transactions in other countries’ currencies is only going to grow.
  9. 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.
RELATED TERMS
  1. Forex Spot Rate

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

    A security that allows currency traders to realize gains without ...
  3. Forex Broker

    Firms that provide currency traders with access to a trading ...
  4. Forex Market Hours

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

    A trading strategy used by forex traders to buy a currency pair ...
  6. Forex Hedge

    A transaction implemented by a forex trader to protect an existing ...
Hot Definitions
  1. Conflict Theory

    A theory propounded by Karl Marx that claims society is in a state of perpetual conflict due to competition for limited resources. ...
  2. Inflation-Linked Savings Bonds (I Bonds)

    U.S. government-issued debt securities similar to regular savings bonds, except they offer an investor inflationary protection, ...
  3. Peak Globalization

    Peak globalization is a theoretical point at which the trend towards more integrated world economies reverses or halts.
  4. Phishing

    A method of identity theft carried out through the creation of a website that seems to represent a legitimate company. The ...
  5. Insurance

    A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an ...
  6. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator ...
Trading Center