As of January 2012, foreign exchange market accounts for more than $4 trillion in average traded daily value, making it the largest financial market in the world. No central marketplace exists for the forex market; rather, traders must conduct their trading activities through forex brokers. An increasing number of forex brokers are available, and traders should take the time to research, evaluate and compare options to find the broker that best fits their needs. This guide will explore the various important considerations when choosing a broker in today's competitive forex marketplace. (In this article we'll look at five considerations when choosing a forex broker. For more, see 5 Tips For Selecting A Forex Broker.)
What is Forex? Forex, often abbreviated FX, is the market where currencies are traded. It is the largest, most liquid financial market in the world, and trades 24 hours a day, five and a half days per week.
What are currency pairs? All forex trades involve the simultaneous buying of one currency and selling of another. In the popular currency pair EUR/USD (euro/U.S. Dollar), for example, the first currency (EUR) is called the base currency; the second (USD) is called the quote currency. When a trader buys a currency pair, he or she buys the base currency and sells the quote currency.
What are the major currency pairs? Four forex pairs are the most heavily traded in the forex market. They are called the majors and include Euro/U.S. dollar (EUR/USD); U.S. dollar/Japanese yen (USD/JPY); U.S. dollar/Swiss franc (USD/CHF); and the British pound/U.S. dollar (GBP/USD). The majors trade under the greatest volume and liquidity.
Why do forex traders need brokers? A forex broker acts as an intermediary between the two parties involved in a forex transaction: the buyer and the seller. While it is possible to buy or sell currencies directly through banks and other institutions, brokers offer services that typically benefit traders such as charting platforms, analysis tools, and access to leverage.
Next: Forex Broker Guide: Broker Basics »
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