How Does The Forex Market Operate?

In common with other financial marketplaces, the Forex operates on the basis of bid/ask price. Where the difference lies is in the dual nature of foreign exchange transactions.

Forex rates are special in that they are expressed as "two tier" rates in order to acknowledge the twin nature of foreign exchange transactions. For instance, USD/JPY at 160/15 means a trader is prepared to purchase Japanese Yen at 160 and sell at 160.15. If the trader finds a buyer at this price, then a 15 pip "spread", the difference between the buying and selling price, will have been made on the deal.

The spread between currencies hinges on market conditions and how traders around the globe believe each currency is going to perform and the likely level of volatility in price.

Unlike other exchanges, such as the London Stock Exchange, the Forex market is truly global, no one state or government can regulate the Forex unilaterally. However, this is not to say those participating in the transactions are not regulated.

It is a 24 hour market and does not experience a daily closing like a traditional stock market. There is nothing more binding than a credit agreement between the buyer and seller in the forex market, and it works.