What is forex exchange?

Forex trading is the process of exchanging one currency for another at a certain rate. Foreign exchange transactions happen on the foreign exchange market which is decentralized and determines foreign exchange rates for every currency. To participate in the forex market you need to register and make an account with a regulated forex broker which makes the forex market a network of banks, institutions, brokers, and individual traders.

The most important role of the forex market is to meet buyers and sellers and by the volume of the orders, the actual exchange rate of each currency is determined. Of course, you can use more simple ways to order currency exchange like banks or exchange desks.

This is usually required when you travel to a country that uses a different currency when you shop online or one of the most important transactions that usually require currency exchange is the trade of oil. Since oil is traded only in US dollars a big corporation or a country needs to first participate in the forex exchange market to buy US dollars to execute the oil deal.

Currencies are listed on the forex market as pairs such as EUR/USD which represents US dollar trading versus the Euro. You also get a price like 1.2345 in this example means that it costs 1.2345 USD to buy 1 euro. Every bank, forex broker, or exchange desk takes a commission to execute any currency exchange order.

That commission is called spread and it can vary and it usually depends on the momentum of your order what kind of spread you'll get. Usually, this is the average spread that is mentioned on the broker's website. So that is how important is to choose a trusted and most importantly regulated forex broker that offers competitive spreads especially when you're trading big volumes of currencies.

How does the forex market work?

Forex exchange market is open five days a week from Monday to Friday for 24 hours a day across the main financial capitals of the globe like London, New York, Tokyo, Hong Kong, and Singapore.

In the past forex market was available only for large companies, hedge funds, and mainly governments but nowadays forex trading only requires an account at a forex broker or bank so every individual can have access to the forex market and be able to trade currencies or to invest long term. In general, when you open a trade in the forex markets you're investing in the currency of a specific country but without the exchange of real money.

Some of the differences of the global forex market are that there are not so many rules for traders and investors as the participation in the options, stock, and futures markets. Another plus in comparison to the other markets is that there are no limitations on when you can or cannot make a trade and you can't match the same fees and commissions on any other market. Also because of its size and liquidity, you can trade almost as much as you can afford and open or close a trade whenever you want.

Forex Forward and Futures market

A forward trade is a trade that will settle on a future date that is agreed upon by the two parts of the deal. The forward price is a sum of the spot rate plus or minus forward points that represent the interest rate differential between the two currencies. Most of the forward trades have a maturity of less than a year in the future. But rarely longer periods are possible.

The futures market is about trading and investing in commodities and the transaction is not only settled on a specific date but also for a specific amount/size of the asset.

What is the Forex Spot market?

Spot trades are made for the short term and for most currencies, the period is two business days. One major exception is the U.S. dollar vs the Canadian dollar. Spot trades for this pair are settled on the next business day.

The U.S. dollar is the most traded currency on the forex exchange markets. As of that fact, the main traded currency pairs on the forex market are the U.S. dollar versus the British pound, Japanese yen, and the Euro. The Spot market can be very volatile because of its short-term nature which is dominated by technical traders and scalpers.