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Individual investors are increasingly trying their hand at foreign exchange trading, also known as forex or FX. No longer reserved for global corporations and institutional traders, forex trading can diversify your portfolio, hedge against future weakening of the dollar, and produce short- or long-term profits. Read on to find out if forex should be part of your investment strategy. We’ll cover forex basics, including how currency trades work, what the risks are, and how you can get started…….Continue reading…..
Source: Forbes
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The foreign exchange market is the most liquid financial market in the world. Traders include governments and central banks, commercial banks, other institutional investors and financial institutions, currency speculators, other commercial corporations, and individuals. According to the 2025 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was $9.6 trillion in April 2025 (compared to $4 trillion in 2010).
Of this $9.6 trillion, $3 trillion was spot transactions and $6.6 trillion was traded in outright forwards, swaps, and other derivatives. Foreign exchange is traded in an over-the-counter market where brokers/dealers negotiate directly with one another, so there is no central exchange or clearing house. The biggest geographic trading center is the United Kingdom, primarily London.
In April 2025, trading in the United Kingdom accounted for 37.8% of the total, making it by far the most important center for foreign exchange trading in the world. Owing to London’s dominance in the market, a particular currency’s quoted price is usually the London market price. For instance, when the International Monetary Fund calculates the value of its special drawing rights every day, they use the London market prices at noon that day.
Trading in the United States accounted for 18.6%, Singapore and Hong Kong account for 11.8% and 7.0%, respectively, and Japan accounted for 3.5%. Turnover of exchange-traded foreign exchange futures and options was growing rapidly in 2004–2013, reaching $145 billion in April 2013 (double the turnover recorded in April 2007). As of April 2025, exchange-traded currency derivatives represent 2% of OTC foreign exchange turnover.
Foreign exchange futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are traded more than to most other futures contracts. Most developed countries permit the trading of derivative products (such as futures and options on futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Some governments of emerging markets do not allow foreign exchange derivative products on their exchanges because they have capital controls.
The use of derivatives is growing in many emerging economies. Countries such as South Korea, South Africa, and India have established currency futures exchanges, despite having some capital controls. Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004.
The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. The growth of electronic execution and the diverse selection of execution venues has lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types.
In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading was estimated to account for up to 10% of spot turnover, or $150 billion per day (see below: Retail foreign exchange traders).An important part of the foreign exchange market comes from the financial activities of companies seeking foreign exchange to pay for goods or services.
Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have a little short-term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency’s exchange rate. Some multinational corporations (MNCs) can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
In a fixed exchange rate regime, exchange rates are decided by the government, while a number of theories have been proposed to explain (and predict) the fluctuations in exchange rates in a floating exchange rate regime, including:
- International parity conditions: Relative purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. To some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions (e.g., free flow of goods, services, and capital) which seldom hold true in the real world.
- Balance of payments model: This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for the continuous appreciation of the US dollar during the 1980s and most of the 1990s, despite the soaring US current account deficit.
- Asset market model: views currencies as an important asset class for constructing investment portfolios. Asset prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain exchange rates and volatility in the longer time frames. For shorter time frames (less than a few days), algorithms can be devised to predict prices. It is understood from the above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of supply and demand.
The world’s currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
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