Forex, FX, or foreign exchange, can be understood as a global marketplace for trading different nations' currencies over a network of buyers and sellers, who agree to transfer their currencies over an agreed price or rate.
While Forex is mainly used for practical purposes, the forex market is very large and liquid, with no centralized location, and no government authority overseeing it. With this, it brings a high chance and high profits, which attracts a lot of investors for trading. it's an electronic network of banks, brokerages, institutional investors, and individual traders known as Forex
Understanding Currency Pair
Most of the forex trade usually includes speculation in the direction of currency values. The price movement of a particular pair of currencies results in traders getting profit. In this particular pair of listed currencies, the first currency of a currency pair is called the base currency, and the second currency is called the quote currency.
Order placed for a currency pair indicates how much quote currency is required for buying 1 unit of the base currency.
Currency Pairs are majorly divided into three categories
Major Currency Pairs
Currency Pairs that are traded against the U.S. dollar are known
as Major Currency Pairs. These Currency Pairs are the most liquid as these are heavily traded.Minor Currency Pairs
Currency pairs that are not traded against the U.S. dollar are referred
to as minor currencies. These pairs are slightly wider spreads and are
not as liquid as the majors. Examples of such a currency pair are
EUR/GBP, CAD/JPY, and GBP/AUD.Exotic Currency Pairs
Exotic currency pairs include currencies of emerging markets. These currency pairs are not as liquid. Such a currency pair is USD/SGD (U.S. dollar/Singapore dollar).
Forex transacts take place in one of three distinct marketplaces:
- The Spot Market
The spot market is where financial instruments and businesses agree to settle transactions at the spot rate. Where the spot rate is the current exchange rate.
Most transactions are settled within one or two business days. The business day excludes Saturdays, Sundays, and legal holidays. In these cases, funds are exchanged on the settlement date, not the transaction date.
- The Forward Market
Any forex transaction that settles after a date later than the spot date is considered a forward forex transaction. The price is calculated based on the spot rate and the difference in interest rates between the two currencies is adjusted to account. The adjusted amount is called "forward points"
In the Forward Market amount of money can settle on any date that is not a weekend or holiday. As in a spot transaction, funds are exchanged on the settlement date.
- The Futures Market A Futures Forex Transaction is based on a currency futures contract, which is an agreement between two parties to do a transaction of a set amount of currency at a set date, in the future.
These Futures contracts are traded on an exchange for set values of currency with set expiry dates. These contracts are non-negotiable and profit/loss is made on the difference between the prices at which the contract was bought and sold.
How big is Forex?
Trading volume is generally very large in the forex market. Average of $6.6 trillion per day.
some largest foreign exchange markets are located in major global financial centers such as Sydney, New York, Tokyo, Singapore, Hong Kong, and London.