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?

    How someone makes money in forex is a speculative risk: you are betting that the value of one currency will increase relative ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. How do you Fund a Forex Account?

    Global currencies are traded on the forex market. Here's how to tap in. 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

    The Pros & Cons Of A Forex Trading Career

    Trading foreign currencies can be lucrative, but there are many risks. Investopedia explores the pros and cons of forex trading as a career choice.
  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

    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.
  8. Trading

    Why It's Important To Regulate Foreign Exchange

    In an increasingly globalized economy, the significance of the foreign exchange marketplace cannot be underestimated.
  9. Trading

    10 Ways To Avoid Losing Money In Forex

    When approached as a business, forex trading can be profitable and rewarding. Find out what you need to do to avoid big losses as a beginner.
RELATED TERMS
  1. Forex Market

    The forex market is the market in which participants including ...
  2. Forex Account

    Opening a forex account is the first step to becoming a forex ...
  3. Forex Option Trading

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

    A forex broker is a service firm that offers clients the ability ...
  5. Liquidation Level

    In forex trading, the specific value of a trader's account below ...
  6. Forex Hedge

    A forex hedge is a foreign currency trade that's sole purpose ...
Hot Definitions
  1. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  2. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  3. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  4. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  5. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center