What is Forex

FOREX, which stands for FOReign EXchange, is the global trading of currencies. More than $3.0 trillion in foreign exchange transactions take place each business day, and the volume is increasing steadily. Until the mid- 1990s the arena was the domain of large banks (the interbank market), governments, and corporations. Now it is possible for small speculators to trade online with any of a large number of retail FOREX broker-dealers using an online trading platform.

It is important to remember that a currency trade is between two currencies—a pair if one of them is the U.S. dollar (USD) and a cross otherwise—and not a buy or sell of something such as a security (e.g., General Motors) or a commodity (e.g., gold) against the dollar.

The most popular currency pair is the EUR/USD—the Eurozone euro against the U.S. dollar. To be long this pair is to want the EUR to go up and the USD to go down. To be short this pair is to want the USD to go up and the EUR to go down.


There is no central clearinghouse for currency trading as there is for stocks or commodity futures. It is the closest thing there is to a pure laissezfaire market. That cuts both ways: The opportunities are enormous but it is a largely unregulated and often cutthroat enterprise.

In the United States, retail FOREX is partially regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). But, with no central clearinghouse, regulation is by definition less robust and effective than in stocks or commodity futures. Regulation is largely limited to seeing that retail brokers meet certain capital requirements and follow good-practice guidelines. Caveat emptor is the watchword in FOREX.