Forex, short for "foreign exchange," is a global decentralised market where traders can buy, sell, and exchange currencies. It's the largest financial market in the world, with over $5 trillion traded everyday.

In simple terms, forex is like a marketplace where people can exchange different currencies. For example, imagine you're planning a trip to Europe, and you need to exchange your US dollars for Euros.

You would go to an exchange office or a bank and exchange your US dollars for Euros at the current exchange rate. The exchange rate is simply the price at which one currency can be exchanged for another.

The forex market works similarly, except that instead of exchanging currency for a trip, traders exchange currencies to make a profit.

In the forex market, currencies are traded in pairs. For example, the EUR/USD pair represents the Euro and the US dollar. If a trader thinks the value of the EUR will increase against the USD, they might buy EUR/USD. If the EUR/USD value increases, it’s a profitable trade. Conversely, if the value decreases, it’s a loss. 

Unlike other financial markets that operate during specific hours of the day, the forex market is open 24 hours a day, five days a week. This means that trading can occur at anytime, anywhere in the world. 

But what might be the reason?

The forex market can operate around the clock due to its decentralised nature. Since there is no central exchange where all trades are conducted, trading can occur across multiple time zones.

As one trading session ends in one part of the world, another one begins in a different part of the world, allowing trading to continue non-stop.

Forex trading is conducted through a network of banks, financial institutions, and individual traders around the world. These participants include:

Banks 

Banks are the largest participants in the forex market, accounting for a significant portion of the daily trading volume. They facilitate forex transactions for their clients, including other banks, corporations, and individual traders.

Financial Institutions

In addition to banks, other financial institutions are involved in forex trading, such as hedge funds, investment firms, and money managers. These institutions trade on behalf of their clients or for their accounts, seeking to profit from the fluctuations in currency prices.

Individual Traders

Individual traders, including retail traders and speculators, comprise a growing portion of the forex market. They can access the market through online trading platforms offered by brokers, allowing them to trade currencies from anywhere in the world.

As we move further into the course, we'll dive deeper into each part explained here and explore them in more detail. 

As discussed in the previous section, forex trading involves buying and selling currency pairs. If you don't understand, refer to the previous part and come back to this part later.

The value of a currency pair is influenced by various factors, including:

Economic Indicators

Economic indicators such as GDP, inflation, and employment data can impact the strength of a country's currency. Positive economic data can lead to a strengthening of a currency, while negative data can lead to a weakening.

For example, if a country's GDP grows faster than expected, its currency may appreciate.

Central Bank Policies

Central banks, such as the Federal Reserve in the United States and the European Central Bank, play a key role in determining the value of their respective currencies.

These banks impact currency prices through monetary policy decisions like interest rate changes and quantitative easing programs. For instance, if a central bank raises interest rates, it can make its currency more attractive to investors, increasing its value.

Political Events

Political events like elections, war, and trade disputes can also impact currency prices.

For example, if there is uncertainty surrounding an election outcome or a potential trade war, in that case, investors may sell off the currency of the affected country, leading to a decrease in its value.

Geopolitical events like natural disasters, war, and international conflicts can also drive the currency pair. These events can create uncertainty and volatility in the market, leading to fluctuations in currency prices.

Market Sentiment

Market sentiment, or investors' overall mood or outlook, can also impact currency prices. If investors are optimistic about a currency, they may be more likely to invest in it, leading to a strengthening.

Conversely, if investors are pessimistic, they may be more likely to sell off the currency, leading to a weakening.

Supply & Demand

Ultimately, currency prices are determined by supply and demand. If there is more demand for a currency, its price will increase; if there is more supply, its price will decrease. This is influenced by all of the factors mentioned above, such as the trading volume and the market's liquidity level.

It's important to note that each currency pair is unique, and the factors that drive one pair may not be the same as those that drive another.

As a forex trader, staying current on economic and political developments, market sentiment, and other factors impacting currency prices is important.

Before moving on, here's a test for you. See if you can get all of them!

A Beginners Guide to Forex