How Forex Market works?

Now, when you have understood the basics of forex and forex trading, let us see how the forex market actually works. Before you start putting in your hard earned money into the forex market, you should understand the basics of forex environment. The forex market is pretty similar to a stock market. In forex market, there are three components: banks, forex dealers and traders.

Before, we go to the details of the three components mentioned above, let us first understand what is actually traded in the forex market. In stock market, you buy or sell the shares of a particular company. You buy the share of a company which you think will give you profit and then you sell the share when you think it has given you enough profit (in ideal world). Similarly, in forex market you trade currency pairs. A combination of 2 currencies is called a currency pair. The rate at which they are exchanged is called the exchange rate. Most of the currencies are traded against the US Dollar since it is the most popular currency in the world. Other popular currencies include Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF).

Now, let us see what the three main components of forex trading environment are:

Banks - The banks or the "interbank market" is nothing but the network of banks which trade the currencies of different countries.

Forex dealers – These dealers are the institutions who have access to trade the currency pairs directly with the banks. These dealers make money through the difference in the bid and ask price of the currency pair. This is also known as the ‘spread’

Retail Traders – Retail traders are people like you and me who want to do forex trading. Since we cannot trade directly with the banks, we need to go through the forex dealers to buy or sell currency pairs. For this purpose, we can use the trading platforms provided by the forex dealers.