The Foreign Exchange( the currency or forex or fx) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The Forex Market is the largest market in the world, with trades amounting to more than USD 3 trillion every day. Most Forex trading is speculative, with only a low percentage of market activity representing governments' and companies' fundamental currency conversion needs.

Unlike the stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread.

Currency trading has a long history and can be traced back to the ancient Middle East and Middle Ages when foreign exchange started to take shape after the international merchant bankers devised bills of exchange, which were transferable 3rd-party payments that allowed flexibility and growth in foreign "exchange market" trading and market deals.

Foreign Exchange Trading or FX Trading, clients are able to hedge against, or speculate upon, changes in the exchange rate of two currencies. A currency trade is the simultaneous buying of one currency and selling of another one. The currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross ( for example, the Euro/US dollar, or the GB pound/Japanese yen). The most commonly traded currencies are the so-called "majors" - EURUSD, USDJPY, USDCHF and GBPUSD.

The most important Forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled immediately, or "on the spot". In practice this means two banking days.

Characteristics

The foreign exchange market is not unified. There is no single dollar rate. Dollar rate varies from one country to another, this is due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is not a single dollar rate but rather a number of different rates (prices), depending on what bank or market maker is trading.

The trading centers in Tokyo, New York and London are the centers of foreign exchange trading. However, all are interconnected. Tokyo may be the center for the Asian market, New York for the US and London for Europe but notice the chain of one to the other two.

Exchange rate usually consists of an integer part and 4 decimal points (or 2 decimal points when expressed per 100 units like e.g. dollar/yen). Thus the decimals are expressed either at 10th thousands or hundreds. Each such 0.0001 is called basis point or pip. E.g. a 50 pips change of 1.5000 is either 1.5050 or 1.49.50.

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