The foreign exchange market (forex) is a market where the currencies of various nations are bought and sold. It is commonly abbreviated to Forex or FX. This is the world’s largest market, with about $3 trillion being traded on a daily basis. The scope of forex exchange is vast, with the market fulfilling purposes ranging from cross-border investment, currency speculation to trade in goods and services.
The forex market comprises of banks, commercial companies, hedge funds, investment management firms, brokers and retail investors. The market does not have any centralized exchange. Trading generally takes place through the interbank market, which is a network of more than a thousand banks. Each bank in the network trades directly with others with the help of an Electronic Broking System (EBS), where buy and sell orders are placed and then matched on the basis of price.
Interbank forex trading continues 24 hours a day, 5.5 days a week, from Monday through midday on Saturday. On a single trading day, the market opens in Australia and shifts operations throughout the day to Asia, Tokyo, Hong Kong, Singapore, Europe and New York. The forex trading day ends with the close of trading in New York.
In the forex market, trading always occurs in currency pairs. The pricing of a currency pair in this market is determined by the demand and supply of a currency in relation to the other in the pair. Apart from banks, currency pairs are bought and sold by individual investors via brokers.
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