# Forex (FX): Definition, How to Trade Currencies, and Examples

Exploring the World's Largest Financial Market

> **Definition**
>
> Forex is short for "foreign exchange," which refers to the market in world currencies.

Forex, a portmanteau of foreign and exchange, is where banks, businesses, governments, investors, and individuals buy or sell currencies. Whenever you purchase something in another currency or exchange cash to get the local money of your vacation destination, you’re taking part in the forex or [foreign exchange (FX) market](https://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp). Businesses and individuals often do this while investors trade currencies to profit from fluctuating [exchange rates](https://www.investopedia.com/terms/e/exchangerate.asp).

Forex is the largest and most liquid market in the world. Participants in this global electronic marketplace traded about $7.5 trillion per day in 2022, far exceeding the daily trading volumes of the world stock market.

### Key Takeaways

*   Forex is the largest financial market, operating 24 hours a day during weekdays across major financial centers.
*   Currencies are traded in pairs, with pricing influenced by various economic factors.
*   Different types of forex trades include spot, forward, and futures contracts.
*   Trading forex involves choosing a broker, understanding leverage, and executing trades.
*   Forex trading carries risks such as leverage and market volatility, but also offers liquidity and flexibility.

![Forex (FX)](https://www.investopedia.com/thmb/Mq2d1s9o7MmV-L19YEjKhoqiy7M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/forex.asp-final-a13505a0ad5a4f519c7677aa151c7113.png)

*— Investopedia / Mira Norian*

## What Is Forex?

Forex is an over-the-counter ([OTC](https://www.investopedia.com/terms/o/over-the-countermarket.asp)) market. There is no single centralized exchange like there is with stocks.

Transactions are made over computer networks that connect traders all over the world. Currencies move among traders, often with the support of a broker. Since it's done electronically, there is typically no physical exchange of actual currencies.

The main markets are open 24 hours a day, five days a week, beginning Sunday at 5 p.m. ET and ending Friday at 5 p.m. ET.

What happens during these sessions determines the value of the world’s currencies or how much of x currency will buy how much of y currency. Currency prices, or exchange rates, are determined by [supply and demand](https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp), or, more specifically, the demand for one currency compared with another. The factors that affect demand for a currency include a country's economic growth, inflation, interest rates set by central banks, and political stability.  

## Types of Forex Markets

The chart above includes information on the size of different types of forex markets.

*   **Spot:** The [spot market](https://www.investopedia.com/ask/answers/06/currencyfuturesandspotfx.asp) is where currencies are exchanged between buyers and sellers at the current exchange rate.
*   **Forward:** The forward forex market is an OTC market where two parties agree to trade a currency for a set price and quantity at a specified future date. These agreements are privately negotiated between the buyer and seller.
*   **Futures:** Futures markets function like forward markets but use centralized exchanges, which protect traders against [counterparty](https://www.investopedia.com/terms/c/counterparty.asp) risk, and offer standardized agreements rather than customizable ones.
*   **Options:** [Forex options](https://www.investopedia.com/terms/forex/f/foreign-currency-option-trading.asp) give participants the right, but not the obligation, to trade currencies at a given price and date in the future. These products trade OTC, with traders able to choose prices and expiration dates that suit them.

## Key Participants in the Forex Market

In the past, big companies, governments, and hedge funds dominated the foreign exchange market. Today, currency trading is much easier for retail investors. Here are the major players in the market:

*   **Commercial banks:** Banks provide a lot of [liquidity](https://www.investopedia.com/ask/answers/052515/what-difference-between-banks-liquidity-and-its-liquid-assets.asp) and are the backbone of the forex market. They trade to hedge and speculate on behalf of their clients.
*   **Corporations:** Any company doing business overseas engages in the forex market, often daily.
*   **Central banks:** Central banks are in charge of managing a country’s economy and money supply. Part of that involves altering how the national currency is valued.
*   **Hedge funds:** Many [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp) speculate on future exchange rates. There are even specific funds dedicated to currency.
*   **Money transfer companies:** Over the past decade or so, alternative companies in the business of exchanging currencies have emerged. Many offer more competitive exchange rates than banks, helping them tap into the large market of foreign workers earning in different currencies and sending money back home.

## Currency Pairs and Pricing

In the forex market, currencies are traded in [pairs](https://www.investopedia.com/terms/c/currencypair.asp). That means when you buy one currency you are simultaneously selling another one—and vice versa.

For each currency pair, there is an exchange rate, indicating how much of the [quote currency](https://www.investopedia.com/terms/q/quotecurrency.asp) is needed to buy one unit of the [base currency](https://www.investopedia.com/terms/b/basecurrency.asp).

For example, one of the most popular currency pairs is [EUR/USD](https://www.investopedia.com/terms/forex/e/eur-usd-euro-us-dollar-currency-pair.asp), which is short for the euro and U.S. dollar. If the exchange rate for this currency pair is 1.10, it means one euro can be exchanged for 1.10 U.S. dollars.

XE.com is one of the most popular places to obtain live exchange rates. If you use its platform, you’ll be given the option to input an amount in a selected currency and convert it to another currency at the current exchange rate.

## How To Trade Forex

How you trade forex depends a lot on your familiarity with currencies and trading. Here’s how a beginner can get started in steps:

1.  **Learn about forex and trading strategies**. Before placing any trades, you need to learn how it all works. This includes familiarizing yourself with the terminology and factors that influence forex prices as well as trading strategies and how things like leverage, stop-loss orders, futures, and options work. The more you know about the tools at your disposal, the better you can use them to your advantage.
2.  **Set up a [brokerage account](https://www.investopedia.com/terms/b/brokerageaccount.asp)**. Now you need to find a platform to trade on. Don’t choose the first broker you come across. Select one that’s regulated, has low fees, and has [good reviews](https://www.investopedia.com/best-brokers-for-forex-trading-4587882). You’ll need to decide if you want to focus more on price or features. Decent customer support, user-friendly platforms, and access to basic tools should be minimum requirements.
3.  **Practice with a demo account**. Most platforms let you practice before trading with real money. It’s worth taking them up on this option, at least to familiarize yourself with how the platform works, test out strategies, and discover how it feels trading in real time.
5.  **Decide on a currency pair and trade**. Now it’s time to trade with real money. Identify a currency pair you think could be profitable and start out slowly, using stop-loss and take-profit orders to manage risk and protect your gains.

## Example of a Forex Trade

Let’s say you think the U.S. dollar will strengthen in value against the euro. Suppose the USD/EUR is trading at 0.90, meaning one U.S. dollar is worth 0.90 euros, and you think it could soon reach parity, meaning one U.S. dollar would buy one euro.

Your rationale is based on studying recent moves in the market and EU-American trade discussions over [tariffs](https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp). Based on this conviction, you exchange 900 euros for $1,000.

Later, the exchange rate changes to 0.98, meaning one dollar now buys 0.98 euros. If you were to cash in at that moment and exit the trade, you would walk away with 980 euros, minus fees, representing an $80 profit.

Let’s assume you stayed in the trade, and the tables turned. After a few more weeks, the euro surged against the dollar, pushing the exchange rate all the way down to 0.85. Now, your original 900 euros would be worth 850 euros, which is a loss, even without factoring in trading fees.

## Risks and Benefits of Forex Trading

Like any investing market, forex trading offers both [risks](https://www.investopedia.com/articles/forex/10/forex-risk-management.asp) and benefits.

Some of the biggest draws are its long opening hours, high liquidity, and all-around accessibility. With forex trading, it’s possible to invest even small amounts and use [leverage](https://www.investopedia.com/articles/forex/07/forex_leverage.asp) (borrow to augment your trades), and transaction costs are generally low.

Risks include how easy it is to use leverage and engage in complex trades in a market known for its volatility. The fact the forex market is decentralized, with no central exchange guaranteeing a trade, adds to this danger. Forex offers a lot more flexibility. But that comes at the cost of less regulation. 

## The Bottom Line

The forex market is used not just to exchange currencies but also to speculate on their future directions, including through futures and options contracts and by using leverage. Today, many retail investors trade through [online brokers](https://www.investopedia.com/best-online-brokers-4587872).

The forex market is known for its accessibility, with low fees, high liquidity, and low minimum investment requirements. However, it's also extremely volatile and can be risky for novices and experts alike.

> **Article Sources**
>
> 1.  IG Bank. “[The Main Differences Between Forex and Stock Trading](https://www.ig.com/en-ch/learn-to-trade/ig-academy/a-beginners-guide-to-forex-trading/forex-vs-stock-trading)."
>     
> 2.  BIS. "[OTC Foreign Exchange Turnover in April 2022](https://www.bis.org/statistics/rpfx22_fx.htm)."
>     
> 3.  FOREX.com. “[Market Hours and Holidays](https://www.forex.com/en-us/help-and-support/market-trading-hours).”