What Is Forex?

The currency market is also called the foreign exchange market, or "FOREX" or "FX" market for short. It is the largest and most liquid market in the world, and it is traded mainly through the 24 hour-a-day interbank currency market - the primary market for currencies. The FOREX market is a cash (or "spot") interbank market. By comparison, the currency futures market is only one percent the size.

Foreign Exchange simply means the buying of one currency and selling of another at the same time. In other words, the currency of one country is exchanged for that of another. The currencies of the world are on a floating exchange rate, and are always traded in pairs - Euro/Dollar, Dollar/Yen, etc. In excess of 85 percent of all daily transactions involve trading of the major currencies - Australian Dollar, British Pound, Canadian Dollar, Japanese Yen, Swiss Franc, and the U.S. Dollar.

Unlike the futures and stock markets, trading of currencies is not centralized on an exchange. Forex  follows the sun around the world. Trading moves from major banking centers of the U.S. to Australia and New Zealand, to the Far East, to Europe and finally back to the U.S.

In the past, the FOREX interbank market was not available to small speculators due to the large minimum transaction sizes and often stringent financial requirements. Banks, major currency dealers and the occasional huge speculator used to be the principal dealers. Only they were able to take advantage of the currency market's fantastic liquidity and strong trending nature of many of the world's primary currency exchange rates.