What is the forex market?

Foreign exchange market definition

The foreign exchange, forex or fx market, is an online, decentralized market for buying, selling, exchanging and speculation in world currencies.

Image by Gerd Altmann from Pixabay

It is decentralized because there is no physical location or market where trading takes place. Trading takes place online, and the traders are spread all over the world. Anyone with Internet or telephone access can trade forex.

The foreign exchange markets operate 24/5 (24 hours per day, five days per week) from Sunday 5pm Eastern Standard Time (10 pm GMT), to Friday 7 pm EST – New York closing time (10 pm GMT). Sydney and Wellington New Zealand actually open first (two hours before Tokyo at 10:00 pm GMT), but less trading takes place until Tokyo opens. Tokyo is the important market in the East. Hong Kong opens and hour after Tokyo (1:00 am GMT). Here is a world map showing the forex trading hours and a desktop monitor that adjusts to your time zone.

Between Friday night and Sunday night, all markets are closed.

The foreign exchange market consists of two “sub” markets.

The Interbank Market

The Interbank Market is the top-level currency exchange where banks exchange currencies.

The banks deal either directly with each other or via electronic brokering platforms.

Market makers are trading firms or banks who buy from, or sell to, traders. Market makers provide the liquidity to enable the market to operate, because there is no central, physical market such as with stocks (shares). Market makers make their money by the market maker spread or bid-ask spread, which is the difference between the price at which the market maker buy and sell a currency. The market maker makes money when the trader buys as well as when the trader sells a currency. Because banks handle such large currency transactions, they dictate currency values. 

Over the counter (OTC) currency market

The OTC market is where individuals and speculators trade forex.

It has become widely used because of the emergence of online trading platforms.

The forex market differ from traditional markets in that a trader can use leverage to buy more of a currency than the trader has cash for. Leverage is a loan provided by the broker to enable a trader to trade a higher value than the money in his/her broker’s account. Leverage can result in losses bigger than the funds a trader has in his account. The warning on all forex advertising is a requirement by the authorities to ensure that traders are aware of the risks attached to forex trading. A trader need not use leverage if the trader has enough funds available, and traders use stop-losses as a risk management tool to ensure that their losses stay within affordable parameters.

A new trader should not trade before he/she fully understands what each word or term in forex terminology means.

Read our Beginner’s Guide to Forex Trading