Every time a tourist exchanges dollars for euros, a company pays an overseas supplier, or a pension fund buys foreign bonds, a currency is bought and another is sold. Add up all of that activity and you get the foreign-exchange market — forex or FX — where the equivalent of several trillion dollars changes hands every day.
There is no exchange building
Stocks trade on exchanges with opening bells. Forex does not. It is an over-the-counter network: large banks quote prices to each other and to brokers, brokers pass prices on to you, and the whole thing runs electronically. That is why the market is open continuously from Sunday evening to Friday evening (US time): as one financial centre closes, another is already open.
The four major trading sessions and the London–New York overlap
Who is on the other side of your trade
- Commercial banks and dealers — the core of the market; they quote the prices everyone else sees.
- Central banks — set interest rates and sometimes intervene directly; they move markets more than anyone.
- Corporations — converting revenue and paying suppliers; they are not trying to beat the market, they just need the currency.
- Funds and speculators — hedge funds, asset managers and individual traders like the people taking this course.
Currencies trade in pairs
You cannot buy "the euro" on its own. You buy the euro with something else, and that something else is almost always another currency. So forex prices are always pairs: EUR/USD, GBP/JPY, USD/CAD. Buying EUR/USD means buying euros and selling dollars in the same instant. If the euro strengthens against the dollar, the price of the pair rises and your position gains.
The most traded pairs, the majors, all include the US dollar: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD and NZD/USD. They have the tightest costs and the most information available, which is why a beginner should start there.
Key terms
- Over-the-counter (OTC)
- Trading directly between parties through a network of dealers rather than on a central exchange.
- Major pair
- One of the seven most-traded pairs, each including the US dollar.
- Session
- The hours during which a regional financial centre is active: Sydney, Tokyo, London, New York.
- Liquidity
- How easily you can buy or sell without moving the price. High during the London–New York overlap, low late in the US evening.
Try it: Open any free charting site, pull up EUR/USD on a 1-hour chart, and note how much larger the candles become around 13:00–16:00 UTC compared with 02:00–05:00 UTC. That is the session effect, and it will matter for every lesson that follows.