Foreign Exchange, or Forex for short, also known as FX trading, is to exchange one currency for another, which means buying one currency versus selling another simultaneously. That's why currencies are always traded in pairs. You can buy or sell currencies to profit from the appreciation or depreciation of one against the other.
You participate in the Forex market when buying imported goods or exchanging money to travel abroad for study, tourism, business, or vacation. Besides these practical purposes, the vast majority of FX trading is undertaken online to profit from price movements.
Forex market is the largest financial market, working around the clock five days a week. Unlike stocks or commodities, there is no central exchange for fx trading. Instead, currencies are traded by the global network of banks, brokers, and dealers.
The currency market known as the Foreign Exchange has been around since ancient times, as early as 259 BC, when converting the Roman denarii into Israeli Shekel. However, the first modern monetary system known as the gold standard took a step in the 1870s by applying fixed countries' currency value against the gold.
The gold standard system was replaced with the Bretton Woods agreement in the mid of 1940s that was the exchange regime using a fixed currency exchange rate against the US dollar, which was pegged in return to the price of the gold.
The Bretton Woods Agreement eventually collapsed in the early 1970s, when the US government announced the suspension of converting the US dollar to gold at a fixed rate, which ushered in the floating exchange rate system.
Today, most nations have adopted a freely floated currency, although the respective national central banks may intervene to control their currency value under financial policies.
As early as the 1990s, online trading platforms started to appear thanks to revolutionary technology development. At the same time, the deregulation of the forex market enables individuals to trade forex worldwide for the first time. Then forex market started to grow enormously, as new types of brokers' trading platforms and electronic dealing platforms extended forex trading capabilities to an increasing number of small participants worldwide.
Forex is the largest and the most liquid financial market in the world by far. The average daily turnover in the forex market has been increasing continuously, starting from 539 B dollars in 1989, and in 2019 onward, it reached 6.6 T dollars per day. It is approximately estimated to exceed 7 trillion dollars in 2021.
Three levels of participants dominate the Forex market.
The largest user of the forex market are the big banks comprise of investment banks and commercial banks, also known as market makers. They trade for their own book and on behalf of their clients as well.
The next large group of participants is big brokers providing smaller institutional clients and individuals with direct access to the market. The most daily volume is dealt with amongst these two segments.
And finally, we have the third group called clients, including retail forex investors, either entities or individuals who trade or hold currencies.