Forex is the abbreviation for foreign exchange, which is the informal market for currency trading.
There are no centralized currency exchange markets, but rather a loose collection of primary and secondary currency dealers that trade in an over-the-counter (OTC) market according to both national rules and international standards and conventions.
Anyone can trade in the forex market, from banks and governments to brokers and individual traders.
The forex market is by far the largest market according to value, measuring in the equivalent of trillions of US dollars exchanged each day. The forex market is open 5 days per week for 24 hours each day, except for relevant national holidays for individual participants.
Every currency is traded in a pair, as no individual currency has any value in the forex market except in relation to some other currency.
Trading in the Forex Market
The relative value of many currencies is tied to the overall perception of that country’s economic performance, with economic data releases regularly leading directly to noticeable price action in relevant currency pairs.
A country’s interest rates as set or influenced by the overt actions of its central bank are also a major determinant of the relative value of its currency. Higher interest rates can lead to capital inflows through bond purchases, but can also lead to a devalued currency through implied economic slowdown.
The reaction of a currency to the rate of inflation is similarly important yet mixed, depending on which aspect of the inflation rate is seen as more important to the currency at that time.
Overall forex trading is seen as more nuanced, though not more complex, than trading in equity, debt and commodity markets, where the forex market is seen to follow its own distinct logic.
The forex market represents an enormous opportunity for day traders to apply classic day trading techniques in a 24 hour market without many of the day trading restrictions seen in the equity market. Most brokers also offer leverage to forex traders that far exceeds what is available in the equity markets.
However, the forex market is a distinct market that follows its own unique logic and reasoning, and day traders should understand the drivers of the currencies they wish to trade before they begin trading.