Foreign Exchange (Forex)

In banking terminology, foreign exchange in the narrower sense refers to all claims denominated in foreign currencies, such as account balances or cheques. Foreign banknotes and coins, by contrast, are treated as a separate category. In trading, foreign exchange, or forex (FX) for short, generally means foreign currencies and the market on which they are traded. Exchange rates are determined by supply and demand; the most important trading centres include London and New York as well as Asian hubs such as Tokyo, Singapore and Hong Kong.

What is forex trading?

The term forex trading simply refers to trading currencies. The foreign exchange market is the largest and most liquid market in the world, and currencies are always traded in pairs: buying one currency means selling another at the same time. In a pair such as EUR/USD, the first currency is the base currency and the second the quote currency; a price of 1.2000 would mean that one euro costs 1.20 US dollars. The most important currencies include the US dollar, the euro and the Japanese yen, while the Australian dollar, the New Zealand dollar and the British pound also receive attention from many traders.

Forex can be traded as day trading or over medium- to longer-term periods. Private traders usually access the currency market through a broker, often via CFDs or similar leveraged products, with position sizes measured in lots.

What is an exchange rate?

An exchange rate is the price of one currency expressed in another. It is formed by supply and demand on the foreign exchange market, which in turn are influenced by factors such as interest rates, economic data and the monetary policy of central banks.

Unlike securities, currencies are not traded on a central exchange but directly between market participants (over the counter). This, together with trading that runs almost without interruption, around the clock from Monday to Friday, makes currencies the most liquid and one of the most flexible trading instruments for traders.

What is an ISO currency code?

Each currency is identified by a three-letter ISO code (standard ISO 4217). As a rule, the first two letters stand for the country and the third for the name of the currency: USD, for example, combines US for the United States with D for dollar. The euro (EUR) is an exception, as it is not tied to a single country. The table lists important codes together with common trader nicknames: