The foreign currency exchange market

Foreign currency exchange market

What exactly is the foreign currency exchange market? The short answer, is that it is the largest financial market in the world. It's where money itself is traded. More specifically, it's the market where different currencies are traded.
And quite a lot too. Every day, trillions of dollars worth of trades are made. Together, all these transactions largely determine the relative values of the world's 100+ currencies.

The foreign currency exchange market is often referred to as forex, which is a combination of the first three letters of the word 'foreign' and the first two letters of the word 'exchange'. Other names used are FX, the foreign currency exchange, or simply the currency market.

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As a new member, you are entitled to a €25 welcome bonus. Keep in mind that your capital may be at risk.

Currency pairs

Because one currency is always traded for another at the foreign currency exchange market, the trading is always done in pairs of currencies.
Different combinations are possible, but in many cases the US Dollar (USD) is part of the pair. The three most popular pairs to trade are the Euro (EUR) and the USD, the USD and the Japanese Yen (JPY), and the British Pound (GBP) and the USD.
In currency trading, each of these combinations is seen as an individual trading product. These trading products are noted as XXX/YYY, where XXX is the first currency quoted relative to the second, or YYY. So, for instance, if you see EUR/USD priced at 1.3306, it means that you can buy 1 euro for 1.3306 dollars.

Decentralized market

Airport currency exchange

Unlike for instance the stock market, the currency exchange market is not limited to certain locations, or dealers who control the prices. In other words: it is not centralized, but decentralized.
If an American takes a holiday in England, and trades some dollars for pounds at the airport currency exchange booth, he is already part of the forex market.
In forex trading, there is an enormous amount of dealers where you can trade currencies. It could be the exchange booth at the airport, but also an online forex broker, where the pricing will most likely be more in your favor.
There is no monopoly, but instead, there's a fierce competition between dealers, who don't charge commissions. And that means you can get very good deals.

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Why trade currencies?

The tourist from before is buying pound sterling because he's in England, and he needs that currency to pay for his daily spending there. When a big electronic company wants to buy parts in Japan, they'll also need to do it in the local currency. So the first reason for currency trading, is simply the need to acquire a foreign currency.
The second main reason is to generate a profit. The currency exchange market is very big and active, so the relative prices of currencies are always changing, which leaves room for speculation. In fact, most of the trading at the foreign currency exchange market is done for this reason.

Participants in the market

Not too long ago, trading at the forex market was mostly done by large financial institutions, such as banks and hedge funds. You basically had to bring many millions of dollars to the table to even be allowed into the market.
But this changed when the internet became available for a large audience in the late 1990s. Suddenly, online forex brokers like Markets.com, eToro and Plus500 appeared, who made currency trading possible for much smaller amounts. The retail foreign exchange market was born, and has grown ever since. Now, anyone with an internet connection can become an active currency trader.

Even though currency trading is now available to all, the big banks are still 'at the top of the food chain', if you will. They even have a separate place where they trade currencies with each other at the best possible rates, called the interbank market.
The biggest banks often exchange billions at a time here, so you can imagine how influential their money exchanges are. The trading activities of these banks with each other still have a lot of effect on the relative values of currencies in all layers of the foreign currency exchange market.

Banks don't just trade with each other. More or less one level lower, they exchange currencies with other players such as forex brokers, hedge funds and large companies. Banks offer these institutions slightly worse prices for currency trading than the participants in the interbank market. That may sound mean, but they have good reason for it.
Banks know that they have a lot of capital, so they don't consider trading with each other very risky. But when they are dealing with any less wealthy party (like a multi-million dollar company...), they want to be compensated for their risk. So they'll buy currency for a little bit less, and sell it for a little bit more.

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Finally there are retail traders, which is what you maybe already are, or will be when you decide to start trading currencies. Retail traders mostly trade through online forex brokers, where they can trade any currency pair they want with just a few simple clicks.

If you want to get started with trading at the foreign currency exchange market right away, we can recommend Plus500 as an excellent broker. This broker's trading software is especially suitable for beginners, with its intuitive design, and controls that are easy to manage.
New members receive a €25 no deposit bonus, which means you'll be able to start trading at the currency exchange market without using any of your own money.

Keep in mind that your capital may be at risk.

For other forex broker recommendations, be sure to read our article on the best online forex brokers.





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