Forex Market 101

Joshua Dawe
Aug 3
3 min read

The foreign exchange (forex) market is the largest financial market in the world, with around $7.5 trillion traded daily (BIS, 2022). It operates quietly behind the scenes of global finance, facilitating everything from international trade to central bank policy and even the currency you exchange on vacation. By breaking it down into Who, What, Where, When, and Why, forex becomes much easier to understand.

Who Moves the Market?

Forex is driven by a diverse group of participants. Central banks such as the Federal Reserve or the European Central Bank influence exchange rates through interest rate decisions, policy guidance, and direct market interventions. Commercial and investment banks execute enormous volumes daily, trading both for clients and on their own accounts, often in hundreds of millions per transaction. Hedge funds and asset managers are active speculators, seeking profit from trends or hedging currency exposure tied to global portfolios. Multinational corporations use forex to manage payments for imports and exports, convert overseas profits, and protect revenues from currency swings. Finally, retail traders—though a small fraction of overall volume—have grown in number thanks to online brokers, offering individuals access to the same market dominated by institutions.

What Exactly Is Forex?

Forex is a decentralized, over-the-counter market where currencies are traded in pairs, such as EUR/USD or USD/JPY. When you trade one, you simultaneously buy another. The spot market handles immediate exchanges and represents a major share of daily activity. Derivatives like forwards and futures allow participants to lock in exchange rates for future transactions, while options provide the flexibility to hedge or speculate with defined risk. Banks also engage in swaps, exchanging currencies and interest payments to manage liquidity. The U.S. dollar dominates the market, appearing in roughly 88% of all trades due to its global reserve status, followed by other majors like the euro, yen, and pound.

Where Does Trading Take Place?

Unlike stocks, forex has no central exchange. Instead, it’s an electronic, global network operating across major financial hubs. London leads the way, handling about 38% of trading, benefiting from its time zone overlap with Asia in the morning and the U.S. in the afternoon. New York is next at 19%, driving dollar-heavy transactions and overlapping London for peak liquidity. In Asia, Singapore has grown rapidly, surpassing Tokyo as the region’s largest center, while Tokyo remains vital for yen trading. Hong Kong, Zurich, Frankfurt, and Sydney also play key roles. Because trading flows seamlessly between these hubs, forex operates 24 hours a day, Monday through Friday, following the sun from Asia to Europe to North America.

When Did the Modern Market Begin?

While currency exchange has existed for centuries, today’s forex market took shape in the 1970s. Before then, under the Bretton Woods system, currencies were pegged to the U.S. dollar, which was tied to gold. This ended in 1971 when the U.S. abandoned the gold standard, ushering in floating exchange rates determined by supply and demand. The 1990s brought electronic trading platforms like Reuters and EBS, transforming speed and transparency, along with the euro’s launch in 1999, which unified European currencies into one major player. Over the 2000s, daily volumes ballooned, algorithmic trading became common, and retail platforms opened the market to individuals. Today’s forex is fast, liquid, and deeply interconnected with technology.

Why does Forex Matter?

Forex underpins the global economy. It allows businesses to pay suppliers abroad, investors to buy overseas assets, and tourists to swap currencies effortlessly. Companies and institutions hedge foreign currency risk, using forwards, futures, and options to stabilize earnings against exchange rate swings. Speculators—from hedge funds to retail traders—add liquidity and help prices adjust to new information, while arbitrageurs exploit tiny discrepancies across markets, keeping rates aligned globally. The market also supports strategies like carry trades, where investors borrow in low-interest currencies to invest in higher-yielding ones, driving capital flows worldwide.

Seen through the lens of the 5Ws, forex is far less mysterious. It’s a market powered by central banks, banks, funds, companies, and traders; it revolves around currency pairs and derivatives; it spans major global hubs and runs around the clock; it evolved from fixed exchange rates to a fast, free-floating system; and it exists to keep global trade and finance flowing. Its scale is unmatched, and its influence touches everything from the cost of imported goods to international investments. Understanding forex is key for any investor navigating today’s interconnected financial world.

Sources

Investopedia (Forex Market Overview, History, Participants)
BIS Triennial Survey 2022 (FX Volumes & Currency Share)
Monetary Authority of Singapore (FX Centre Rankings)
Liberty Street Economics (NY Fed)
VSkills Forex Tutorial (Hedging, Speculation)
Wikipedia (Foreign Exchange Market)