The forex market explained: how currency trading works

The foreign exchange market, or forex (FX), is where currencies are bought and sold. Every time a company pays a foreign supplier, a tourist changes money or a fund buys foreign stocks, someone on the other side swaps one currency for another. Add the banks and investors who trade currencies for their own sake, and forex becomes by far the largest financial market in the world.

It is also organized very differently from the stock market. There is no central exchange and no single closing price. Most trading happens over the counter, between banks and their clients, on electronic platforms and by phone, around the clock on weekdays. Prices are set by thousands of dealers quoting to each other and to their customers, and a single pair, EUR/USD, trades more than many entire stock markets.

This guide explains how the market is structured, what is traded in it, who the participants are, which currency pairs dominate and what the long history of EUR/USD shows about how currencies move. The next guides cover Currency pairs and pips: quotes, lots, pip value and leverage and the Forex trading sessions: Sydney, Tokyo, London and New York hours.

How big the market is

Every three years the Bank for International Settlements (BIS), working with central banks and other authorities in 52 jurisdictions, runs the Triennial Central Bank Survey, the main census of currency trading. Its April 2025 survey, published on September 30, 2025, found:

Because every trade involves two currencies, the currency shares add up to 200%, not 100%. The dollar's 89% reflects its role as the market's vehicle currency: a trade between two smaller currencies is often done as two trades against the dollar, because each of those pairs is more liquid than the direct cross.

What is traded

Forex is not only spot currency. The BIS counts several instruments:

• Spot. An exchange of two currencies at today's rate, conventionally settled two business days later. This is what most people mean by "the exchange rate."
• Outright forwards. An agreement to exchange currencies on a future date at a rate fixed today. Importers and exporters use them to lock in costs and revenues.
• FX swaps. A spot trade paired with a forward trade in the opposite direction. Banks and companies use them to borrow one currency against another for a period. They are the largest single instrument.
• Currency swaps and options. Longer-term exchanges of interest and principal, and the right but not the obligation to exchange at a set rate.
• Exchange-traded futures. Standardized contracts on exchanges such as CME Group. A CME Euro FX futures contract covers €125,000. Futures are a small slice of total FX turnover but give a transparent, centrally cleared price.

How the over-the-counter market works

In the OTC market a dealer, usually a large bank, quotes a bid (the price at which it will buy) and an ask (the price at which it will sell). The difference is the spread, which is the dealer's compensation and the trader's main cost. For the most traded pairs at busy hours the spread is a fraction of a hundredth of a cent; for thinly traded currencies it can be far wider.

The market has layers:

• The interdealer market. Large banks trade with each other, mostly on electronic platforms. Prices here are the tightest.
• Dealer-to-client. Corporates, asset managers, hedge funds and smaller banks trade with dealers, on single-bank or multi-bank platforms or by phone.
• Retail. Individuals trade through retail forex dealers or brokers, which set their own prices based on the wholesale market. Retail is a small share of turnover.

Because there is no central exchange, there is no official "price of the euro." Each platform shows its own quotes, and data providers publish reference rates taken at set times. The Federal Reserve's daily rates, for example, are noon New York buying rates.

Who trades currencies

• Banks and dealers make markets and manage their own positions.
• Companies convert export revenue and pay foreign suppliers, and hedge expected flows with forwards.
• Asset managers and pension funds buy foreign stocks and bonds, which requires currency, and often hedge part of that exposure.
• Hedge funds and proprietary traders speculate on rate differences, growth and momentum.
• Central banks manage reserves and occasionally intervene to influence their currency; see Central banks around the world: Fed, ECB, BOJ, BoE and more.
• Individuals trade through retail platforms or simply change money when they travel.

The major pairs

There is no regulatory definition of a "major," but by market convention the majors are the most traded pairs involving the US dollar: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD and NZD/USD. Pairs that do not include the dollar, such as EUR/GBP or EUR/JPY, are crosses. Pairs that include an emerging-market currency, such as USD/MXN or USD/ZAR, are often called exotics; they usually have wider spreads and larger moves.

EUR/USD since 1999

EUR/USD is the most traded pair, so its history is a good case study in how far and how long a major currency can move.

• 1999 to 2000: a weak start. The euro began trading in January 1999 and averaged $1.1591 that month. By October 2000 it averaged $0.8525, down about 26%.
• 2002 to 2008: a long climb. The euro was back above parity by late 2002 and averaged $1.5759 in July 2008, the high of the series.
• 2008 to 2022: a long decline with rallies. It averaged $1.2178 in January 2021 and then fell below parity in September and October 2022 (October average $0.9853), for the first time since 2002.
• 2023 to 2026: a partial recovery. The September 2026 monthly average was $1.1505, and the Fed's daily noon rate on October 23, 2026 was $1.1199.

From the October 2000 low to the July 2008 high, the euro gained 85% against the dollar (1.5759 ÷ 0.8525 − 1). That is a large move for the world's two biggest currencies, and it shows why companies with foreign operations hedge, and why a currency position can dominate the result of a foreign investment. The forces behind such swings are covered in The US dollar and exchange rates: indexes, drivers and earnings.

Pitfalls for newcomers

• Leverage cuts both ways. Retail accounts allow notional positions up to 50 times the deposit, so small moves produce large gains or losses on the money put up.
• Prices differ by venue. Without a central exchange, your dealer's quote, a chart provider's close and an official reference rate can all differ slightly.
• Spreads widen when you least want them to: around major data releases, at the weekly open and in thin holiday trading.
• Interest matters. Holding a position overnight earns or pays the interest-rate difference between the two currencies, which can add up over months.
• Currencies are relative. A pair can move because of either currency. EUR/USD can rise because of good euro-area news or bad US news.

Forex compared with other markets

How Finabase does it

The /forex page lists 51 currency pairs in groups (majors, European crosses, yen crosses, Asia-Pacific and emerging-market pairs) with the last rate, the day's change, returns from one week to two years, 52-week range and moving averages. It can be shown as a table, a heat map (/forex?view=map), charts or signal gauges. Every pair has a symbol page with a chart, such as EUR/USD.

Finabase is a market-data and research app, not a forex dealer: it does not execute currency trades, and it does not show dealer bid-ask quotes or BIS turnover data. The EUR/USD history chart on this page is ours, built from the Federal Reserve's public data.

Frequently asked questions

How big is the forex market?

About $9.6 trillion of currency changed hands on an average day in April 2025, according to the BIS Triennial Survey, up 28% from 2022. FX swaps and spot trades account for most of it.

Is forex traded on an exchange?

Mostly not. Spot, forwards and swaps trade over the counter between dealers and their clients. Currency futures and some options do trade on exchanges such as CME Group, but they are a small share of total turnover.

What are the major currency pairs?

By convention, the most traded pairs that include the US dollar: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD and NZD/USD. EUR/USD is the most traded of all.

Why is the dollar involved in most trades?

The dollar is the main currency for trade invoicing, international borrowing and central bank reserves, so it is the easiest currency to trade against any other. Many trades between two non-dollar currencies run through the dollar in two steps. The BIS found the dollar on one side of 89% of trades in April 2025.

Summary

Forex is a decentralized, over-the-counter market where dealers quote currencies to each other and to clients around the clock on weekdays. It turned over $9.6 trillion a day in April 2025, with FX swaps and spot the largest instruments, the dollar on one side of 89% of trades and London the largest center. The majors are the most liquid dollar pairs, crosses leave out the dollar and exotics include emerging-market currencies. EUR/USD's 85% rise from 2000 to 2008 and its fall below parity in 2022 show how far even the biggest currencies can move, which is why leverage, spreads and the interest difference between currencies matter so much to anyone who trades them.