Forex (foreign exchange) is the market where currencies are traded against each other. It's the largest and most liquid market in the world — over $7 trillion changes hands every day. Unlike stocks, there's no central exchange; it's a decentralized network of banks, brokers, and traders connected electronically.
Currency Pairs
Currencies always trade in pairs — you're betting one currency will strengthen against another. In EUR/USD, EUR is the base currency (you buy or sell this) and USD is the quote currency (the price is in dollars). If EUR/USD is 1.0850, one euro costs $1.0850.
- ▸If you buy EUR/USD, you expect the euro to rise against the dollar.
- ▸If you sell EUR/USD, you expect the euro to fall against the dollar.
Who Trades Forex?
| Participant | Role |
|---|---|
| Central banks | Set interest rates, intervene to stabilize currency |
| Commercial banks | Provide liquidity, trade for clients & themselves |
| Corporations | Hedge currency exposure from trade |
| Hedge funds | Speculate on macro trends |
| Retail traders | Speculate via brokers — smallest volume but growing |
What Moves Currency Prices
- 1.Interest rates — higher rates attract capital, strengthening the currency.
- 2.Economic data — GDP, inflation, employment reports shift expectations.
- 3.Central bank policy — quantitative easing, rate hints, forward guidance.
- 4.Geopolitics — elections, wars, trade disputes create safe-haven flows.
- 5.Market sentiment — risk-on favors growth currencies; risk-off favors USD, JPY, CHF.
Because the market is global, trading follows the sun: Sydney, Tokyo, London, New York. There's always at least one major financial center open from Monday morning in Asia to Friday close in New York.