Foreign exchange (or “forex”, “FX”, or just "currency") trading is the act of selling one currency to buy another – and hopefully coming out financially better-off as a result. It's a huge market – one of the world's biggest, in fact – and, by becoming more accessible to retail investors, has attracted more and more interest.

Currency markets are big. Really, really big. In fact, they’re the biggest market in the world, with more than $7 trillion changing hands each day. They’re also old. Really, really old. After all, it’s nearly 2,000 years since Jesus got bolshy with the money changers in the Temple. ✨

There are some 180 currencies around the world today. Whether florins in Aruba or Ethiopian birr, each pumps through its nation’s veins. That’s fine within a single country: a Malaysian shopkeeper can swap their ringgit for dinner down the road, and everyone’s happy.

But whenever we cross a border, we hit a snag. A Nigerian naira isn’t much use at an American Walmart checkout…

Enter the currency markets. A Nigerian can use their naira to buy US dollars to pay Walmart. But first they have to find someone else to buy their naira and sell them good ol’ greenbacks. Fortunately, giant middlemen step in. They’ll buy the naira and hold them until someone else wants them: perhaps a foreigner looking to buy in Nigeria.

Most currencies nowadays “float”, which means their value constantly changes relative to others. When we talk about exchange rates, we mean how much of one currency you can buy with another. £1 might get you about $1.30 today, but back in 2008 it’d get you over $2.

Why should I care about forex trading?

As an investor, your wealth will be directly affected by currency swings on the daily – even if you don’t own a passport. Any time you invest outside your home country you buy into another currency, whether you like it or not. And even if all your investments are in domestic companies, they’ll almost certainly be buying from or selling to foreign firms – meaning currency moves will hit their profits.

There are also plenty of venues offering you the chance to speculate on moves in currencies – if you’re willing to take a risk. But we’ve gotta be franc: trying to actively trade currencies can give your wealth a pounding. ⚖️

So, even though it’s not necessarily recommended that newbies sit at home trading currencies, it’s still useful for all investors to be aware of how this fundamental market functions.

What is the forex market?

Whereas the stock market is largely confined to a number of exchanges, the forex market isn’t centralized in the same way: trading is primarily done electronically and “over-the-counter.” Forex markets are open 24 hours a day, five days a week, thanks to the overlap between key currency trading hubs around the world. That makes it relatively easy to buy and sell currencies whenever investors want – and they certainly do. The large volume of trades every day means the forex market is incredibly liquid.

Who trades on the forex market?

Once upon a time, forex trading was the preserve of major companies, big-time investors, or the ultra-wealthy. If a large US company wanted to buy widgets in Germany, say, it’d need to change its dollars into Deutsche Marks to make the purchase – and global investment banks were all too willing to step in and help. Hedge fund investors, betting on or against certain currencies, were able to join the fray and speculate. Meanwhile, high net worth individuals might ask their advisors to move some money to other countries for safe keeping.

And while investment and commercial banks still do the lion’s share of forex trading nowadays, it’s a market accessible to everyone including individuals. Retail investors can access any number of platforms to trade currencies, from beginner through to expert levels of complexity and sophistication. And even if you don’t intend to be a currency investor, you’re trading forex every time you exchange currency for your vacation. 🌎