The foreign exchange market is often described simply as a place where traders buy one currency and sell another.
That description is technically correct—but it leaves out most of what actually makes the forex market work.
Unlike a traditional stock exchange, forex does not operate from one central marketplace where every buyer and seller meets. Instead, foreign exchange is an enormous global network involving banks, financial institutions, corporations, investment managers, central banks, brokers and other market participants.
The scale of that market is enormous.
According to the Bank for International Settlements (BIS), OTC foreign-exchange turnover averaged approximately $9.5 trillion per day in April 2025, up 27% from the 2022 survey. The final results of the 2025 BIS Triennial Survey were released in June 2026.
What Is the Forex Market?
Forex, short for foreign exchange, is the global marketplace for exchanging one currency for another.
A currency is always quoted relative to another currency.
For example:
EUR/USD = 1.1500
This means one euro is worth 1.1500 US dollars at the quoted exchange rate.
If EUR/USD rises from 1.1500 to 1.1600, the euro has appreciated against the US dollar. If it falls to 1.1400, the euro has depreciated against the dollar.
You are never simply buying or selling a currency in isolation. You are trading the relative value of one currency against another.
Why Doesn’t Forex Have One Central Exchange?
The global OTC forex market is decentralized. There isn’t one global exchange that controls all EUR/USD transactions.
Instead, prices and liquidity are distributed across a network of financial institutions and trading venues.
Large banks and financial institutions interact with one another and with clients. Brokers then provide retail traders with access to their trading infrastructure and liquidity arrangements.
This structure explains why two brokers can occasionally show slightly different prices or spreads at exactly the same moment.
Who Actually Trades Forex?
1. Commercial and Investment Banks
Banks are among the most important participants in the global FX market. They facilitate transactions for clients, manage their own exposures and provide liquidity to other market participants.
2. Central Banks
Central banks influence currency markets through monetary policy, interest rates, liquidity operations and, in some circumstances, foreign-exchange interventions.
3. Investment Funds and Asset Managers
Large investment managers may trade currencies when investing internationally, hedging foreign investments, managing currency exposure or adjusting portfolio allocations.
4. Multinational Companies
Companies frequently use forex markets for practical business reasons. A multinational company may need to convert one currency into another because its revenues and expenses occur in different countries.
5. Hedge Funds and Other Professional Traders
Professional trading firms may use currencies for directional trading, relative-value strategies, macroeconomic positioning, hedging and portfolio diversification.
6. Retail Traders
Retail traders represent a much smaller portion of the overall institutional FX ecosystem, but technology has made leveraged FX and CFD trading accessible through desktop and mobile platforms.
What Happens When You Place a Forex Trade?
Suppose your trading platform shows:
EUR/USD 1.1500 / 1.1501
The first number is the bid and the second is the ask. If you want to buy immediately, you normally transact at the ask. If you want to sell immediately, you normally transact at the bid.
The difference is called the spread.
In this example:
0.0001 = 1 pip
Spreads can widen during major economic announcements, market openings, rollover periods, thin liquidity and extreme volatility.
What Is Liquidity?
Liquidity describes how easily an asset can be bought or sold without causing a significant price change.
High liquidity generally means more available counterparties, tighter spreads, easier execution and lower transaction friction.
Low liquidity can produce wider spreads, faster price jumps, greater slippage and less predictable execution.
Why Trading Sessions Matter
The global FX market operates across different financial centres, commonly discussed as the Asian, London/European and New York sessions.
The important concept is not simply memorizing opening times. It is understanding overlap.
When major financial centres are active simultaneously, trading activity and liquidity can increase. The London-New York overlap is closely watched by many short-term traders because both major financial centres are active.
Why Does EUR/USD Move?
A currency pair moves because market participants continuously reassess the relative value of its two currencies.
It can respond to changes in interest-rate expectations, inflation, economic growth, employment, central-bank policy, government bond yields, political developments, risk sentiment and capital flows.
Instead of asking only, “Why is the euro going up?”, a better question is: Why is the euro strengthening relative to the dollar?
Price Is a Reflection of Expectations
Markets are forward-looking. A central bank can leave interest rates unchanged while a currency moves sharply because its communication changes expectations about future policy.
This is why experienced traders often focus on the difference between what happened and what the market expected to happen.
Why Economic News Can Produce Huge Candles
Suppose the market expects US inflation to come in at 2.8%, but the actual number arrives at 3.3%. Traders may immediately reassess the future path of US interest rates.
Bond yields can move, dollar expectations can change and EUR/USD, gold and other markets can react simultaneously.
This is why a strategy that works during normal conditions can behave differently around major news.
Forex Is a Network, Not a Single Machine
A useful mental model is to imagine the forex market as a huge network connecting central banks, global banks, investment firms, corporations, brokers and retail traders.
These relationships are not always a simple straight line. Different participants interact with different liquidity providers, banks and venues.
The Important Lesson for Retail Traders
You don’t need to compete directly with a global investment bank. You need to understand the environment in which your trade exists.
- What currency pair am I trading?
- What is driving the pair?
- Is liquidity currently high or low?
- Are important economic releases approaching?
- Is the spread normal?
- Where is my invalidation level?
- How much am I risking?
- Is the potential reward appropriate for the risk?
Key Takeaways
- Forex is a global decentralized OTC market.
- BIS data shows approximately $9.5 trillion in average daily OTC FX turnover in April 2025.
- Banks and institutions account for a huge portion of FX activity.
- Retail traders represent only one part of the market.
- Currency pairs represent the relative value of two currencies.
- Spreads generally reflect the difference between bid and ask prices.
- Liquidity and volatility change throughout the trading day.
- Economic expectations can matter more than headline data itself.
- Major news can dramatically change spreads and execution conditions.
Frequently Asked Questions
Is forex traded on one central exchange?
No. The global OTC FX market is decentralized and involves a network of banks, financial institutions, dealers and other participants.
What is the largest forex market session?
London and New York are two major global FX centres, and their overlapping active hours are closely watched by many traders.
Why does the spread change?
Spreads can change according to liquidity, volatility, market conditions and broker or liquidity-provider pricing.
Does high liquidity mean a trade will be profitable?
No. Liquidity can improve execution conditions, but it does not predict the direction of price.