What is Forex? What Forex Trading Is and How It Works

 What is Forex?

What Forex Trading Is and How It Works

There are around 13.9 million traders across the globe that are simultaneously buying and selling currencies. As we mentioned before, this means that the liquidity of the forex market is really high.

These high levels of liquidity mean that traders can enter and exit a trade, as there will normally be a buyer for the currency that you’re selling, or a seller for the currency that you’re buying!

High liquidity levels have other implications too. If the levels of liquidity are high, then there are a lot of market participants, so trading costs, like the spreads could potentially be lower. It also means that the market is way less susceptible to market manipulation! If someone opens a huge trade in a market with low liquidity, it’ll have a huge impact on price. This doesn’t happen in forex because there is such a large volume being traded!

Now, the forex market, as it encompasses all of the currencies in the world, is actually open 24 hours a day, from Monday until Friday. The trading that is done on these currencies is what we call over the counter or OTC for short. This means that there isn’t a physical exchange like there is for stocks. It’s actually a global network where there’s a network of financial institutions and banks that oversee the market rather than a central exchange like the New York Stock Exchange.

As an individual, you’re likely to be categorized as a 'retail trader'. However, the largest portion of forex trades are actually conducted by ‘institutional traders’ like banks, funds and large corporations. They’re not necessarily going to actually buy or sell the currencies but are speculating about price movement or hedging against upcoming changes in the exchange rate.

Let’s look at an example

Forex

A retail trader like yourself would sell the EURUSD if they believe that the price of the USD will appreciate in value against the EURO.

Forex

An American firm however, would be able to use the forex market to hedge should the EURO weaken, meaning that should the value of their income fall, they’ll still make profit on the depreciation of the USD.