Lesson: Foreign exchange

Lesson: Foreign exchange.
The foreign exchange market, commonly referred to as the Forex or FX, is the global marketplace for the trading of one nation's currency for another.
The forex market is the largest, most liquid market in the world, with trillions of dollars changing hands every day. It has no centralized location, and no government authority oversees it.
Rather, the forex is an electronic network of banks, brokerages, institutional investors, and individual traders (mostly trading through brokerages or banks).

KEY TAKEAWAYS

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  The forex is a global marketplace for exchanging national currencies.
  
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  Foreign exchange venues comprise the largest securities market in the world by nominal value, with trillions of dollars changing hands each day.
  
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  Foreign exchange trading uses currency pairs, priced in terms of one versus the other.
  
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  Forwards and futures are another way to participate in the forex market.
  

Understanding the Forex

The Forex market determines the day-to-day value, or the exchange rate, of most of the world's currencies. If a traveler exchanges dollars for euros at an exchange kiosk or a bank, the number of euros will be based on the current forex rate. If imported French cheese suddenly costs more at the grocery, it may well mean that euros have increased in value against the U.S. dollar in forex trading.
Forex traders seek to profit from the continual fluctuations of currency values. For example, a trader may anticipate that the British pound will strengthen in value. The trader will exchange U.S. dollars for British pounds. If the pound then strengthens, the trader can do the transaction in reverse, getting more dollars for the pounds.

Currency Pairs

In forex trading, currencies are listed in pairs, such as USD/CAD, EUR/USD, or USD/JPY. These represent the U.S. dollar (USD) versus the Canadian dollar (CAD), the euro (EUR) versus the USD, and the USD versus the Japanese yen (JPY).
There will also be a price associated with each pair, such as 1.2569. If this is the USD/CAD pair, it means that it costs 1.2569 CAD to buy one USD. If the price increases to 1.3336, then it now costs 1.3336 CAD to buy one USD. The USD has increased in value against the CAD, so it now costs more CAD to buy one USD.
In the forex market, currencies trade in lots, called micro, mini, and standard lots. A micro lot is 1,000 worth of a given currency, a mini lot is 10,000, and a standard lot is 100,000. Trades take place in set blocks of currency. For example, a trader can exchange seven micro lots (7,000), three mini lots (30,000), or 75 standard lots (7,500,000).
Trading volume in the forex market is generally very large. Trading in the foreign exchange markets averaged $6.6 trillion worth per day in April 2019, according to the Bank for International Settlements