What is Forex?

Trading Dictionary: What is Forex?

When I started trading many years ago, foreign exchange and fx were the most commonly used terms in the forex industry. In futures trading, the words currency and currencies were mainly used to describe this market. The FOREX was the name of the association of New York interbank foreign exchange dealers and appears to have been derived from the first few letters of the term FOReign EXchange.  What is forex? Over the years, as the foreign exchange market evolved into the era electronic trading so did its name. Forex appears to now be the word most commonly used for the foreign exchange market, especially in the trading community.

So, you might ask what is forex? It is first important to understand that a foreign exchange rate is determined by the relationship between two currencies, which is the amount of one currency it takes to sell in order to buy an equivalent amount of another currency and vice versa. Prior to 1971, foreign exchange rates were fixed until the Bretton Woods accord ended this system and ushered in the era of floating exchange rates which continues today. This is why forex rates are constantly changing.

What is FX trading?

Forex trading differs from other markets as there is no centralized exchange to conduct transactions, which usually take place between two counterparties. Forex trading is the largest financial market in the world, with daily average turnover well in excess of $4 billion. The evolution of the foreign exchange market has seen it grow from what was once the domain of commercial, investment and central banks. This has seen other participants, with access to electronic platforms, take on a greater role. These include hedge funds, fund managers, multinational companies, private speculators and investors, and emerging market central banks. Perhaps the biggest change has been the role of emerging market central banks due to the build up and diversification of foreign exchange reserves as they have taken on a bigger influence in the forex market.

Forex trading is conducted around the clock, 5 days per week, 24 hours per day, starting on Monday morning in New Zealand and ending in the United States on Friday afternoon. As major centers open for the day (e,g, Sydney, Tokyo, Hong Kong, Singapore, Frankfurt, London, etc), liquidity increases as each joins in the rotation. This also allows the diverse participants that make up the forex market to react to events, whether economic or political, at any time they occur. This is especially true today where access to electronic trading platforms provides the opportunity to trade from an office, home or on the go using a mobile device at any time the market is open. This has seen the retail forex industry grow as traders are attracted by the ability to trade around the clock on electronic platforms with increased liquidity, tight bid-offered spreads, low margin requirements, flexible trade amounts, in up (i.e. bull) and down (i.e. bear) markets

So what is forex?

It is the relative value of currencies in relation to the dollar and one another that is constantly changing. A forex rate is determined by a global market made up of a diverse group of participants that operates 5 days per week. 24 hours per day.

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