Forex
Family I · Instruments
Not to be confused with cfd.
Forex is the global over-the-counter market where national currencies are exchanged in pairs, with prices quoted as the amount of one currency required to buy another. Trading occurs continuously across financial centres, and the market has no single central exchange. Participants include banks, corporations, funds and retail traders.
How a forex quote works
A currency pair such as EUR/USD states how many units of the quote currency (USD) are needed to buy one unit of the base currency (EUR). A quote of 1.1000 means one euro costs 1.10 US dollars. The difference between the bid and the ask is the spread, which is a transaction cost.
Positions are sized in lots. A standard lot is 100,000 units of the base currency, though brokers also offer mini, micro and nano lots. Leverage, margin requirements and the availability of specific pairs vary by broker and by jurisdiction.
Worked example
The same calculation in reverse would produce a loss of 500 USD if the exit price were 1.0950. Spread, commissions and swap charges are not included in this figure.
Sessions and drivers
Forex trading is divided into sessions: Sydney, Tokyo, London and New York. Liquidity is generally highest when the London and New York sessions overlap. Prices respond to interest-rate decisions, inflation data, employment figures and geopolitical events.
Because currencies are always quoted in pairs, every forex position is simultaneously long one currency and short another. This differs from instruments that track a single underlying asset.
Often confused with
- cfd
- A forex trade involves exchanging or holding a position in an actual currency pair, whereas a CFD is a derivative contract that tracks the price of an underlying asset without any currency changing hands; the visible sign is that a forex quote always names two currencies, while a CFD names one underlying instrument.