Forex (Foreign Exchange) is the name given to the "direct access" of foreign currencies. With an average daily volume of $1.4 trillion, forex is 46 times larger than all the futures markets combined and, for that reason, is the world's most liquid market. In the past, forex trading was limited largely to enormous money center banks and other institutional traders. But in just the past few years, technological innovations and the development of online trading platforms allow small traders to take advantage of the significant benefits of trading foreign currencies with forex. In contrast to the world's stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world.
Buying and Selling
In the forex market, currencies are always priced and traded in pairs. You simultaneously buy one currency and sell another, but you can determine which pair of currencies you wish to trade. For example, if you believe the value of the euro is going to increase vis-รก-vis the U.S. dollar, then you would go long on EUR/USD instrument (currency pair). Obviously, the objective of forex currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought / sold one currency pair and has not sold / bought back the equivalent amount to effectively close the position.
Foreign Exchange
The simultaneous transaction of one currency for another
Foreign Exchange Market
An informal network of trading relationships between the world's major banks and other market participants, sometimes referred to as the interbank market. The foreign exchange market has no central clearinghouse or exchange, and is considered an over-the-counter (OTC) market
Spot Market
The market for buying and selling currencies at the current market rate.
Rollover
A spot transaction is generally due for settlement within two business days (the value date). If you open a position on Monday, the value date will be Wednesday, but if you hold it past rollover on Monday, the new value date will be Thursday. Every margin transaction involves borrowing one currency to purchase another, so you will pay interest on the currency borrowed, and earn it on the one purchased. For example, if you are long (bought) NZD and short (sold) JPY, you would earn interest on the NZD and pay it on the JPY. The amount you pay or receive is based on the interest rate differential between the two currencies in the transaction. Most brokers will automatically roll over your open positions (typically at 5PM New York time/10PM GMT) allowing you to hold a position for an indefinite period of time.
Currency Pair
The two currencies that make up an exchange rate. When one is bought, the other is sold.
Base Currency
The first currency in the pair. Also the currency your account is denominated in.
Counter Currency
The second currency in the pair. Also known as the terms currency.
