Forex (FX) is a contraction of foreign exchange, referring to the global market for buying and selling currencies. The Forex market is indisputably the largest and most liquid financial market in the world, boasting trillions of dollars in trading volume
Participants – ranging from day traders to international banks – set global exchange rates. Naturally, those that have a more substantial impact will be major institutions like commercial banks, which make up the bulk of trading activity. These players interact either directly with one another or through electronic brokers.
As with cryptocurrency
markets, participants trade currency pairs (EUR/USD, GBP/CNY, JPY/CHF, AUD/NZD, etc.). The difference here is that they deal exclusively in fiat money
such as the British pound, Canadian dollar, or Japanese yen. Another similarity is uptime: while not available 24/7/365 like digital currency markets, Forex is open for 24 hours a day, excluding weekends.
You could also compare the decentralized nature of both markets. Unlike with stocks, you’re not limited to trading platforms like the New York Stock Exchange (NYSE) or NASDAQ for trading currencies. Exchanges are conducted around the globe without the oversight of a single regulatory body.
Forex, as we know it today, is a relatively recent phenomenon, largely spurred on by the termination of the Bretton Woods system in 1971. This resulted in the decoupling of the US dollar from gold, opening it up to floating exchange rates determined by supply and demand on the foreign exchange market.
Forex trading can be speculative in nature, or it can form part of a hedging
strategy. Trades could equally be executed in order to acquire currency to buy assets in another country. Spot markets are where the majority of trades occur. This stands to reason, as derivative products are reliant on this real-time volume to function effectively. To maximize the efficiency of spot trades (and given the very thin margins), traders often opt to use a combination of technical analysis
, leverage, and scalping to generate returns.
Futures and forward contracts
are popular alternatives to the spot markets. These can be particularly useful for the purposes of hedging.