The foreign exchange market – also known as forex or FX – is the world’s most traded market.
According to the Bank for International Settlements, global forex trading in 2022 averaged over $7.5 trillion each day. To put that into context, trading on the stock market averages around $553 billion each month.
Which might seem like a lot, but it is just 7% of the total volume seen in FX.
What is forex trading?
Forex trading is the buying and selling of global currencies. It’s how individuals, businesses, central banks and governments pay for goods and services in other economies. Whenever you buy a product in another currency, or exchange cash to go on holiday, you’re trading forex.
However, a significant proportion of forex trades aren’t for practical purposes. Speculative FX traders seek to profit from fluctuations in the exchange rates between currencies, speculating on whether one will go up or down in value compared to another.
How forex trading works
Forex is traded in pairs, meaning that when you trade forex, you are exchanging one currency for another. When buying EUR/USD, for example, you’re buying euros while selling the US dollar.
If the euro strengthens against the dollar, your position will increase in value
If the euro weakens against the dollar, it will decrease in value
Currency markets never decline in absolute terms – for one currency to go up, there will be others weakening against it. All currencies cannot go up at the same time. There is always going to be a winner and a loser.
FX traders weigh up whether a currency looks likely to strengthen or weaken against another, then trade that pair accordingly.