How The Forex Market Works

To explain how the forex market works, it’s easiest to put it in a context that many people understand. Imagine you are visiting a new country. When you leave the plane, you will see a currency exchange counter or booth in the airport. To get around the city you’re in, you’ll need the local currency, so you need to exchange the currency you have from your native country for that of the new country. 

When you walk up to the counter, you’ll be met with a screen which illustrates the different exchange rates for the different currencies. This exchange rate is simply the relative price of two currencies that come from two different countries. The act of exchanging the currency you have for local currency is your participation in the forex market. In a sense, you are selling your native currency for the local currency. 

Upon returning home, you realize you have currency from the country you visited still in your wallet. Because you can’t use that currency to buy goods and services in your native country, you must participate in the forex market again by exchanging the foreign currency for your local currency. However, exchange rates have changed and you may find that you don’t receive as much for the foreign currency as you expected. That variable exchange rate is the forex market in action.