Trading Fundamentals
An introduction to the foreign exchange market, how currencies are traded, when the market is active, and what may influence currency prices.
The foreign exchange market, commonly known as forex or FX, is the global marketplace where national currencies are exchanged. Unlike stock exchanges, forex has no central location; it operates electronically over the counter through a worldwide network of banks, brokers, institutions, and individual participants.
Currencies are traded in pairs, such as EUR/USD or USD/JPY. When trading a pair, one currency is bought while the other is sold. The price of a pair reflects how much of the quote currency is needed to purchase one unit of the base currency, and that price can change as supply and demand shift around the world.
Currency pairs are typically grouped into three categories. Majors include the most traded pairs, all involving the US dollar, such as EUR/USD, GBP/USD, and USD/JPY. Minors, or crosses, are pairs between major currencies that do not include the US dollar. Exotics pair a major currency with one from a smaller or emerging economy and tend to have wider spreads and lower liquidity.
The forex market is generally active 24 hours a day, five days a week, following the major financial centres of Sydney, Tokyo, London, and New York. This schedule allows market participants to respond to news and economic events during the trading week, though liquidity and volatility can vary depending on which sessions are active.
Currency values are influenced by a wide range of factors, including interest rate decisions, inflation data, employment figures, geopolitical events, and overall market sentiment. Central bank policy is one of the most important drivers, since changes in interest rates can shift capital flows between economies and reshape the relative value of their currencies.
Participants may be drawn to forex because of its liquidity, weekday market access, and the ability to take positions in either direction, going long when they expect a currency to strengthen, or short when they expect it to weaken. As with any leveraged market, forex trading carries significant risk, which is why education and risk management are important.
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