Introduction Into The Forex Market

What is the Forex Market

In the following a short introduction into the Forex market is given. Forex is the abbreviation for Foreign Exchange and sometimes even this is just shortened to FX. The Foreign Exchange is a global decentralized currency market where participants from all over the world can swap money from one currency into another. The Foreign Exchange market deals thus with all aspects of buying, selling and exchanging currencies.

The forex market is an over-the-counter (OTC) market as there is centrally cleared or unified market for the majority of threads, and there is also little cross-border regulation. A number of interconnected marketplaces make up the forex market. On this market different currency instruments are traded. This means that there are also a number of different rates (prices) and not a single exchange rate, depending on what bank or market maker is trading and which session is used. Due to arbitrage the rates of those interconnected marketplaces are quite close. Most of the trading volume is traded in New York and London although banks from all over the world participate. Since London is quite dominant usually the London market prices are quoted in the European session.

Who Are The Market Participants

Major international banks, central banks, governments, multinational corporations, other financial organizations as well as currency speculators are the participants. Hence the individual trades between foreign exchange dealers can be very large and involve hundreds of millions of dollars. It is therefore the world largest market in terms of volume. The table below lists the top currency traders by overall volume according to Euromoney:

Top Currency Traders in 2015

RankNameMarket share
1United States Citi16.11%
2Germany Deutsche Bank14.54%
3United Kingdom Barclays Investment Bank8.11%
4United States JPMorgan7.65%
5Switzerland UBS AG7.30%
6United States Bank of America Merrill Lynch6.22%
7United Kingdom HSBC5.40%
8France BNP Paribas3.65%
9United States Goldman Sachs3.40%
10United Kingdom Royal Bank of Scotland3.38%

Forex Market Hours

New York, Tokyo, Sydney, and London are the main trading centres. During the whole day currency trading takes place and the trading literally follows the sun. When the North American session ends the Asian session (Tokyo and Sydney) starts. After that trading goes over into the European session which is then followed again by the North American session. Apart from the weekends the currencies are traded continuously during the week. Below are the trading hours of the major sessions according to Investopedia:

Trading Sessions Hours

CityNew York (EST)Tokyo (JST)London (GMT)
New York08:00h to 17:00h EST22:00h to 07:00h JST13:00h to 22:00h GMT
Tokyo19:00h to 04:00h EST09:00h to 18:00h JST00:00h to 09:ooh GMT
Sydney17:00h to 02:00h EST07:00h to 16:00h JST22:00h to 07:00h GMT
London03:00h to 12:00h EST17:00h to 02:00h JST08:00h to 17:00h GMT

Currencies are traded in pairs and their exchange price is influenced by a number of factors such as the gross domestic product (GDP) growth, interest rates, inflation as well as budget and trade deficits or surpluses, or other macroeconomic conditions. Since currencies are traded in pairs each currency pair is essentially a separate trading product. The table below lists the most traded currencies by value according to Wikipedia.

Most Traded Currencies

RankCurrencyISO 4217 code
 % daily share
(April 2013)
1 United States dollarUSD ($)87.00
2 EuroEUR (€)33.40
3 Japanese yenJPY (¥)23.00
4 Pound sterlingGBP (£)11.80
5 Australian dollarAUD ($)8.60
6 Swiss francCHF (Fr)5.20
7 Canadian dollarCAD ($)4.60
8 Mexican pesoMXN ($)2.50
9 Chinese yuanCNY (¥)2.20
10 New Zealand dollarNZD ($)2.00
11 Swedish kronaSEK (kr)1.80
12 Russian rubleRUB (₽)1.60
13 Hong Kong dollarHKD ($)1.40
14 Norwegian kroneNOK (kr)1.40
15 Singapore dollarSGD ($)1.40
16 Turkish liraTRY (₺)1.30
17 South Korean wonKRW (₩)1.20
18 South African randZAR (R)1.10
19 Brazilian realBRL (R$)1.10
20 Indian rupeeINR (₹)1.00

Note: The total sum has to be 200% because each currency trade always affects two currencies.

Currency pairs are noted XXXYYY or XXX/YYY. XXX is the so called base currency whereas YYY is referred to as counter currency. Most currency pairs are quoted to the 4th decimal place. The exception to this rule is the USD/JPY currency pair which is quoted only to the 2nd decimal place. A typical quotation looks therefore like this: EUR/USD 1.1130. This means that 1 Euro can buy 1.1130 US Dollars. The decimal places are also referred to as pips (points in percentage). If the EUR/USD moves from 1.1130 to 1.1129 then the currency pair has fallen by 1 pip. It is not rare for currency pairs to fluctuate by 70 pips during the course of a day.


The Market