The foreign exchange market (forex) allows investors to trade two currencies against each other. Forex rates are what it costs to exchange one country’s currency for another country’s currency.
Trading forex is essentially pairs trading: You’re buying one currency and selling another. Let’s look at the U.S dollar versus the Canadian dollar (USD/CAD) as an example. If USD/CAD is trading at 1.37, that means $1 USD is equal to $1.37 CAD. The easiest way to understand the quote of any currency pair is to read the pair from left to right.
The forex market is a dynamic, global market open virtually around the clock. And because foreign exchange rates are based on global interest rates as well as macroeconomic and geopolitical conditions, they’re always fluctuating.
The bulk of foreign exchange rate trading takes place on what’s called the interbank market, which is an over-the-counter (OTC) market that is not traded on an exchange. The interbank market consists of a web of banks, dealers, intermediary brokers, and retail traders.
Time to Hit the Market?
If you’re a sophisticated investor looking for international exposure and see long-term or short-term opportunities in cross-border interest rate differentials, the foreign exchange market may be worth a look.
To learn more about forex, visit the TD Ameritrade forex page.
Also, watch the video below to learn more about forex trading.
Investing Basics: Forex