How the Forex Currency Exchange Works

The Forex currency exchange is a huge financial market, unlike anything else in the world. If you're unfamiliar with how it works, here are the basics you need to know.

Many Participants

One of the unique things about the Forex market is that it has so many participants involved. In the stock market, you've really only got a few players in the game. You've got the buyers, the sellers and the centralized market where they do business. In the Forex market, you've got buyers, sellers, major banks, electronic brokering services, smaller banks, ECN brokers, retail brokers and hedge funds.

This makes the Forex currency exchange one of a kind in that you don't always have to do business with the same parties. You could get prices from many different entities that are all selling the same currencies pairs. This ensures that you can get the best prices at all times.

The Forex Hierarchy

While the foreign exchange market has many participants, it does have some structure to it, which keeps it from being completely chaotic. At the top of the Forex food chain are the major banks and a few medium-sized banks. They trade on the electronic brokering services with each other. This is also referred to as the interbank market. They have the lowest prices on currency pairs.

Below them is the next tier of participants. This includes the retail brokers, ECN brokers, market makers, hedge funds and large corporations. They have to trade with the help of medium-sized or small banks.

Below that level is you, the trader. Not that you're not important or anything. You just don't have trillions of dollars to trade in the market every day. Or do you? If you do, feel free to make a donation to the Forex Trading Rookie trading fund by contacting us.

For you, the average trader, to access the market, you have to work with retail and ECN brokerages. You could also get involved with a hedge fund if you have at least $1 million in net worth (not counting your house) or if you make at least $200,000 per year. So for the average Joe trader out there, Forex brokers are the way to go.

Helping the Little Guy

In the past, this bottom layer of the Forex market wasn't even there. This made it impossible for regular guys like you and me to get involved. With the invention of the Internet and online brokers, it made it possible for anybody to get involved. So even though you may not have as sweet of a deal as the major banks, at least you get to play.

It's a little like showing up to the casino and signing up for a poker tournament only to be told that you have to wear an eye patch and play with one hand. It might slow you down a bit, but at least you can still win some money.

Return From Forex Currency Exchange to Forex Market

Return From Forex Currency Exchange to Forex Trading