What is Foreign Exchange?
Updated: March 28, 2012 at 4:32 AM
Foreign Exchange Definition. Foreign Exchange, or "Forex", "FX" or "4X", is the simultaneous buying of one currency and selling of another. The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, governments, corporations, currency speculators, and other financial institutions. The modern foreign exchange market started forming during the 1970s when Richard Nixon ended the Gold Standard for the U.S. Dollar in line with other countries that had gradually switched to floating exchange rates. Previously, various account pegging schemes had been tried, such as the Bretton Woods system, but all failed to simulate true market forces. The average daily volume in the global forex and related markets is continuously growing. It determines the relative values of different currencies and trades 24/7 except on weekends. The primary purpose of the foreign exchange market is to support international trade and investment. According to the Bank for International Settlements, average daily volume in global foreign exchange markets is estimated at $3.98 trillion, as of April 2007. $3.21 Trillion is accounted for in the world's main financial markets. The breakdown of transaction types is 32% for "spot", 12% for forwards, and 56% for "swaps". London is the largest market with 34% of the volume. New York has 17% and Tokyo, 6%. The balance consists of derivative and futures trading on various commodity and futures exchanges.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.