Foreign exchange is the simultaneous buying of one currency and the selling of another.
Foreign exchange can be as simple as exchanging one currency for another at currency exchange shops and kiosks in airports.
But with regard to trading, foreign exchange transactions can take place on the foreign exchange market, also known as the “forex market” or “FX market”.
When you’re making trades in the forex market, you’re buying or selling the currency of a particular country, but unlike currency exchange shops and kiosks in airports, there’s no physical exchange of money from one hand to another.
The forex market is the largest, most liquid market in the world, with daily trading volume exceeding $5 trillion.
There is no centralized location and forex transactions happen “over-the-counter” (OTC).
The foreign exchange market is an electronic network of banks, brokers, non-bank financial institutions, and individual traders (mostly trading through dealers).
It is open 24 hours a day, five days a week across major financial centers across the globe. This means that you can buy or sell currencies at any time during the day.
The largest forex trading centers are London, New York, Tokyo, Singapore, Zurich, and Hong Kong.
Currencies are traded in pairs, priced in terms of one versus the other.
For example, the euro and the U.S. dollar] (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).
Because you’re not buying anything physical, this kind of trading can be confusing.
Think of buying a currency as buying a share in a particular country.
When you buy, say, Japanese yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.