Foreign exchange – also known as “forex” or “FX” – is the global market for exchanging currencies.

It’s the world's largest financial market – even bigger than the bond or equity markets – with an average daily trading volume worth a staggering $7.5 trillion.¹

Unlike equities and many bonds, however, currencies are not traded on centralized exchanges. 

Instead, currency trading occurs between a vast network of banks and large financial institutions buying and selling digitally with each other.

It takes place 24-hours-a-day for five days a week, starting 5pm Sunday New York time and ending 5pm Friday New York time.

Given its global nature and the absence of a central exchange, foreign exchange trading has become ever more important to enabling international imports and exports and as investors and companies buy and sell assets overseas.

As well as those with payments needs, FX market participants include qualified investors who speculate on and hedge against currency movements.

Currencies’ values don’t exist in isolation. 

They are always traded in “pairs”: meaning the value of one currency is invariably quoted in terms of another currency.

There are hundreds of different combinations from which to choose. 

Widely traded pairs include the US dollar against the euro, Japanese yen and British pound.

In any FX transaction, one currency is bought and the other is sold.

This means as one goes up, the other falls. 

In other words, it’s impossible for all currencies to rise or fall at the same time.

By definition, one currency’s losses are another’s gain.

The strength of a country’s currency on the foreign exchange market may be seen as a measure of confidence in its economy.

If a country's economy is performing well, investors may be more likely to invest in the country, which increases the demand for its currency.

Historically, when interest rates go up, a country’s currency tends to rise in value because higher rates attract more foreign investment.

Stable economies also tend to have lower inflation and higher growth, which can make their currencies more attractive to foreign investors.

In addition to economic factors, geopolitical events and central bank policies can also play a significant role in driving forex markets. 

For example, political instability, trade disputes and changes in monetary policy can all impact currency values and create volatility in the forex market.

Not everyone is suitable to invest in FX strategies, as they are speculative and highly illiquid. 

Only qualified investors – with the necessary experience and sophistication and who are willing to assume the high economic risk – should consider doing so. 

For such investors, FX strategies may help seek returns and diversify portfolio risk. 

That’s because currency prices may move differently from those of traditional asset classes, such as equities and bonds.

A wide variety of strategies, techniques and instruments can be used by qualified investors in foreign exchange trading. 

For example, some investors may seek to exploit tiny movements up or down in a currency pair over just a few seconds (or fractions of a second!)

Other investors may hold a position over many months or even longer seeking to capture a much bigger movement.

Some strategies may offer the potential for returns if a currency pair stays broadly stable over a certain period rather than moving a lot in one direction.

Another possibility is borrowing in a currency with a low interest rate and investing in a currency with a high interest rate. This strategy seeks to earn interest and perhaps make a profit on currency moves too.

These transactions represent just a small range of what can be done.

Investors should carefully review and consider potential risks before investing in any FX strategy. 

The FX market is inherently volatile. 

Exchange rates can move for many reasons, posing a risk that an investor will agree to a transaction and the price has moved before the deal is completed. 

Interest rate changes and major geopolitical events such as war and political unrest can trigger big and sudden movements in exchange rates. 

Leveraged trading involves borrowing money to seek higher potential return on an investment but is considered risky because it magnifies both profits and losses.

For example, if a trader with $1,000 in their account uses 100:1 leverage to open a $100,000 position and the trade moves just over 1% against them, they could lose all of their initial capital and end up owing their broker more money than they have in their account.

Counterparty risk is when a party to a currency transaction defaults on their side of the agreement. 

For example, if the party gets into financial difficulty, it may be unable to deliver an agreed payment to the other side.