How Does Forex Markets Work?
The foreign exchange or forex market is an over the counter or decentralized marketplace for the trading of international currencies. This market decides international exchange rates for each currency traded. It consists of all aspects of purchasing, selling and trading currencies in current or established prices. This market keeps money moving around the world and brings billions of dollars into global markets every day.
There are a few different types of foreign exchanges, each having its own unique characteristics. Spot forex (or “spot”) forex is one of the most well known types of forex, and is essentially a swap of one currency for another. It is the most commonly used type of foreign currency exchange.
Another type of forex is forward forex. This type of forex involves the purchase of a certain number of currencies, at a fixed interest rate, and then sells these same currencies back at a specified interest rate. A good example of this is the foreign exchange market in the U.S., which has the Fed buys large quantities of U.S. dollars with the goal of lowering interest rates. These interest rate adjustments are essentially what move the Forex markets.
Forex retail traders participate in interbank trading. Interbank forex is similar to the forex market, but instead of between individual traders and banks, it is between banks and other financial institutions. With retail forex trading, there are more individual traders than there are institutions. These traders include individuals, small investors and institutional traders. Large institutions such as investment banks, hedge funds, and mutual funds are also participating in interbank transactions.
Major forex markets include the U.S. Dollar Index, the Euro FX, the Japanese Yen, the Australian Dollar, and the Swiss Franc. In addition, there are a number of smaller-name foreign exchanges that use the U.S. Dollar as their main currency pair. The largest of these is the London Interbank Market, or the MIB. The MIB runs on the interbank market and is considered the biggest daily trading volume by investors. These daily trading volume numbers give forex investors an idea of how much trading occurs on the market each day.
Each of these major currency pairs are traded over three major global exchanges. These exchanges include the COMEX, the NYSE, and the NASDAQ. The euro is the most heavily traded currency by traders globally. The euro is typically bought and sold in the US dollar, the UK pound, and the Japanese yen.