What is forex and how does it work?

Forex, also known as the currency market, is the conversion from one currency to another. It is one of the most active markets in the world, with an average daily turnover of 5 billion dollars. Learn more about what forex is how the forex market works and how forex leverage works.

What is forex?

Forex, or foreign exchange market, can be comprehended as a network of customers and also sellers that trade currencies at a decided rate. It is just how retail investors, firms and central banks transform one currency to one more. If you have actually traveled abroad, you have actually most likely done a forex trade.

A large number of operations are carried out for practical reasons, but the vast majority of currency conversions are carried out by investors to make profits. The amount of currencies converted daily can cause the price movements of some of them to be extremely volatile. It is precisely this volatility that makes forex so attractive to investors: it provides greater opportunities to maximize profit, although it also increases risk.

How does the currency market work?

Unlike stocks or commodities, forex trading is not carried out in markets, but is exchanged directly between two parties in an over-the-counter (OTC) market. The forex market is established through a global network of banks, scattered in four main centers in different time zones: London, New York, Sydney and Tokyo. As there is no physical place through which operations are processed, you can invest in forex 24 hours a day.

There are three different types of forex markets:

  • Forex spot market: it is the physical exchange of the currency pair, which takes place at the exact moment in which the transaction is settled or after a small margin of time
  • Forex forward market: a contract is established to buy or sell a fixed amount of currency at a given price, and whose expiration is made on an established future date or within a range of future dates
  • Forex futures market: a contract is agreed to buy or sell a certain amount of a given currency at a set price, on a fixed date in the future. Unlike a forward, a futures contract is legally binding

Most forex investors are not interested in receiving the physical delivery of the currency, but they make predictions about exchange rates to obtain benefits thanks to price movements in the market.

How does forex trading work?

There are different ways to trade forex, but they all work the same way: buying one currency and selling another simultaneously. Traditionally, forex trades were carried out through a broker, but thanks to online trading providers, you can obtain benefits from currency price movements using derivatives such as CFDs.

CFDs are leveraged products that allow you to open a position by paying only a fraction of its total value. Unlike unleveraged products, you do not own the asset, but open a position when you think that the market value is going to go up or down.