What is forex and how it differs from other markets
The world's biggest market, why it never sleeps, and what makes it attractive to traders.
The foreign exchange market, forex or FX, is where currencies are exchanged. Every time a company pays a foreign supplier, a tourist changes money or a fund buys foreign bonds, a currency trade happens somewhere. Average daily turnover is measured in trillions of dollars, more than all the world's stock markets combined.
Currencies trade in pairs
You never just buy "the euro". You buy euros with dollars (EUR/USD), or with yen (EUR/JPY). Every trade is a bet on the relative strength of two economies.
If you think the European economy will outperform the US, you buy EUR/USD. If you think the Bank of Japan will keep rates low while the Fed keeps them high, you might buy USD/JPY.
How forex differs from shares
| Forex | Shares | |
|---|---|---|
| Hours | 24 hours, five days a week | Exchange hours only |
| Venue | Over the counter, global | Central exchange |
| Liquidity | Extremely deep in majors | Varies by company |
| Drivers | Interest rates, economic data, central banks | Company earnings, sector news |
| Typical daily move | Under 1% in majors | 1–3% for large companies |
Why traders like it
- Liquidity. Large orders in EUR/USD barely move the price, and spreads are tight.
- Long and short are equal. A currency falling is just the other currency rising.
- Clear drivers. Scheduled data releases and central bank meetings are published in advance on the economic calendar.
- Round-the-clock access. You can trade before work, at lunch or in the evening.
What to watch out for
Small daily moves tempt traders into large positions through leverage. A 0.5% move is quiet for EUR/USD, but on an oversized position it can breach a daily loss limit. Respect position sizing above everything else.
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