What Is the Forex Trading System?

Forex traders buy and sell currency.

Forex is the acronym for "foreign exchange" and generally refers to the decentralized foreign exchange market and trading system. It is also referred to as FX. Buyers and sellers all over the world participate in over-the-counter 24-hour forex trading without the assistance of a centralized exchange such as the New York Stock Exchange. Forex is the largest market in the world.

Purpose

Foreign exchange is essential to international trading. The forex market allows investors to trade currencies. This is necessary for individuals and businesses to purchase goods from other countries. When you make a purchase from another country, your money must be exchanged to the local currency. You must buy foreign currency or the company you make your purchase from must exchange your money into its country's currency. You can purchase foreign currency from banks or foreign exchange traders and even other types of businesses that provide financial services. The world of forex is fast-paced, as brokers and individual investors can trade at any time day or night, except for weekends. According to FOREX.com, 5 percent of forex trading is for international business transactions and 95 percent is from speculators.

Trading

Brokerage houses, banks and government institutions all participate in trading on the foreign exchange market. A network of foreign exchange dealers facilitates the trades. Dealers negotiate buy and sell prices with each other. Dealers have contacts with many other dealers to negotiate prices. Dealers will buy a currency at one price from another dealer and sell it at a slightly higher rate to customers from banks to individuals. The spread between the buy-sell price is the dealer's profit. Most dealer transactions are conducted in the major financial centers such as New York, London, Paris, Tokyo and Sydney.

Activity

As of 2011, the daily turnover of forex trading can be as much as $4 trillion, according to the Bank for International Settlements, an institution that serves as an international central bank. Major banks, stock exchanges and other financial institutions provide customers up-to-date data on current exchange rates. In major cities and international airports, you can see foreign exchange rates posted in the windows of exchange businesses and banks. Forex trading is available from Sunday at 5 p.m. ET until Friday 5 p.m. ET. The financial markets in Sydney, Australia are the first to open and kick off the forex week. This round-the-clock schedule allows traders to respond immediately to market activity no matter the hour of the day.

The Majors

Over 85 percent of trading is conducted in pairs such as dollars for euros or yen for euros. Most trading is conducted in currency from the world's richest counties. These are called the "majors" and include the U.S. dollar, British pound sterling, euro, Japanese yen, Swiss franc, Australian dollar, New Zealand dollar and Canadian dollar.

References

• FOREX.com: Introduction to the Forex Market
• Bank for International Settlements: Triennial Central Bank Survey Report on Global Foreign Exchange Market Activity in 2010
• Federal Reserve Bank of New York: Foreign Exchange
• NASDAQ: Forex -- Currency Trading
• Federal Reserve Education: The Basics of Foreign Trade and Exchange
• Federal Reserve Bank of New York: The Story of Foreign Trade and Exchange

Resources

• Federal Reserve Bank of New York: Foreign Exchange Rates Historical Search