What Is Forex and How Does It Work?

Forex is the global market for exchanging foreign currencies, where currencies are traded in pairs. This means buying one currency while simultaneously selling another. The market operates primarily over the counter (OTC) and includes banks, financial institutions, companies, liquidity providers, brokers, and other market participants.

In this article from NPE Market, we first explain how the Forex market works and then cover currency pairs, price formation, market participants, trading volume, key concepts, and the differences between Forex, stocks, and cryptocurrencies.

How Does the Forex Market Work?

The Forex market operates based on the relative value of two currencies. For this reason, currencies are displayed in pairs, such as EUR/USD or USD/JPY.

For example, if EUR/USD is 1.1000, it means that one euro is worth 1.10 US dollars. If a trader expects the euro to appreciate against the dollar, they can take a long position on the currency pair. Conversely, if they expect the euro to weaken against the dollar, they can take a short position.

An important point is that Forex is not a centralized market with a single global order book. Spot transactions and a large portion of currency derivatives are conducted through OTC markets, while traders access liquidity through networks of major dealers, financial institutions, and trading platforms.