How the forex market works: who trades, where prices come from, and where you fit in

The forex market is a global, over-the-counter network where currencies are exchanged between banks, companies, funds, governments and individuals. There is no single exchange: prices are set by dealers quoting each other electronically, around the clock from Monday morning in Asia to Friday evening in New York. Retail traders usually access it through a broker, most often by trading contracts that track exchange rates rather than buying and holding foreign cash.

That is the short answer. The rest of this guide explains who is actually on the other side of the market, how a price gets from a bank in London to the chart on your phone, and what that structure means for the costs and risks you take on as a retail trader.

What the forex market actually is

At its simplest, a foreign exchange transaction is a swap of one currency for another at an agreed rate. A German car maker selling in the United States receives dollars and needs euros to pay its staff. A Japanese pension fund buying US Treasury bonds needs dollars. A tourist from Manchester needs euros for a week in Lisbon. Every one of those is a forex transaction, and together with the far larger volume of financial trading, they make up the market.

What makes forex different from the stock market is structure. Shares in a listed company trade on an exchange with a central order book, one official price, and set opening and closing times. Currencies do not. Forex is over-the-counter (OTC): trades are agreed directly between two parties, or on one of many competing electronic platforms, and there is no single official price at any given moment. Instead there is a cloud of very similar prices, quoted by many dealers, that move together because arbitrage keeps them in line.

How big is it?

Very. The Bank for International Settlements (BIS) runs a Triennial Central Bank Survey that is the standard reference for the size of the market. The 2022 survey put average daily turnover at around $7.5 trillion, and the 2025 survey at around $9.6 trillion. For comparison, that is many times the daily value traded on all the world's stock exchanges combined.

Two things are worth knowing about that headline figure:

• It counts more than spot trading. A large share is FX swaps and forwards, which banks and companies use for funding and hedging. Spot, the instrument closest to what retail traders mimic, is only a part of the total.
• Most of it is wholesale. The bulk of turnover is between dealers and large institutions. Retail trading is a small slice of the whole, which is one reason a retail trader has no influence on the price.

The US dollar is on one side of the large majority of all trades, which is why it is often called the market's vehicle currency. Even a trade between, say, the Swedish krona and the Mexican peso is frequently done in two legs through the dollar, because there is more liquidity in each currency against USD than against each other.

Who trades currencies, and why

It helps to sort participants by their reason for trading, because motive shapes behaviour.

Commercial banks and dealers

The biggest global banks act as market makers. They continuously quote prices at which they will buy and sell, earn the difference between those prices (the spread), and manage the risk that builds up on their books. Collectively this group is often called the interbank market, although these days much of their trading is done on electronic platforms rather than by phone between dealers.

Central banks

Central banks such as the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan set interest rates, which are one of the main forces behind exchange rates over time. Some also intervene directly, buying or selling their own currency to slow a move they consider disorderly. You can read more in our guide to central banks and interest rates.

Companies

Importers, exporters and multinationals need foreign currency to run their businesses. They mostly trade to hedge: locking in a rate now so that a sale or purchase months away is not wiped out by a currency move. Their flows are steady and often large, but they are not trying to profit from the direction of the market.

Asset managers and pension funds

When a fund buys foreign shares or bonds, it has to buy the currency first. Many also hedge some or all of that currency exposure. These investment flows can move markets for weeks, especially around month-end and quarter-end rebalancing.

Hedge funds and proprietary traders

These participants trade currencies for return. They might bet on interest-rate differences between countries, react to economic data, or follow trends with systematic models. They are a significant source of short-term volume and volatility.

Retail traders

Individuals trading through online brokers. In money terms the group is small. Its defining features are high leverage, small account sizes and, according to the risk disclosures brokers are required to publish in the EU and UK, a majority of accounts that lose money.

How prices form: the layers of the market

Think of the forex market as a series of tiers, each one slightly further from the centre.

1. The top tier. The largest dealing banks and electronic platforms, where the tightest prices are available in very large size. Two of the long-established inter-dealer platforms are EBS and Refinitiv (now LSEG) Matching, but there are many others, plus banks' own single-dealer platforms.
2. The second tier. Smaller banks, non-bank market makers, hedge funds and large corporations, who get prices from the top tier, usually slightly wider.
3. Prime brokers and aggregators. Firms that give smaller institutions, including retail brokers, access to a pool of liquidity from several providers at once.
4. Retail brokers. They take prices from their liquidity providers, apply their own markup or commission, and stream the result to their clients.
5. You. You see the broker's price, not the interbank price. It should be close, but it is not identical, and it is not the same at every broker.

Because there is no central exchange, the price you see is always somebody's quote. Two brokers showing EUR/USD at the same moment may differ by a fraction of a pip. That is normal. What matters is whether your broker's prices are consistently fair and whether orders are filled at the price shown. Our guide to reading a forex quote explains the bid and ask you see on screen, and spreads and commissions explains what that gap costs you.

Liquidity: why some prices are tighter than others

Liquidity is how easily you can trade a meaningful amount without moving the price. In forex it depends on three things.

• The currency pair. EUR/USD, the most traded pair in the world, has enormous depth and usually the tightest spreads. A pair like USD/TRY or EUR/HUF has far less, so spreads are wider and prices can jump. Our guide to currency pairs covers majors, minors and exotics.
• The time of day. Liquidity is highest when the big financial centres overlap, particularly when London and New York are both open. It thins out in the late New York afternoon and around the daily rollover. See forex market hours and sessions.
• Events. Around major data releases and central bank decisions, dealers pull or widen their quotes until the news is absorbed. Spreads can widen sharply for seconds or minutes, and orders may fill at worse prices than expected. Our guide to slippage covers what happens to your orders then.

A useful mental model: liquidity is not a fixed property of a pair. It is something that comes and goes during the day and disappears quickly when everyone wants to do the same thing at once.

How retail traders access the market

Unless you are moving money for a business or a holiday, you are unlikely to be exchanging physical currency when you trade. Retail forex trading generally happens in one of these forms.

CFDs and rolling spot forex

In the EU, the UK and many other regions, the most common route is a contract for difference (CFD) or a rolling spot contract with a broker. You agree to exchange the difference in price between opening and closing. You never take delivery of euros or dollars; your account is simply credited or debited the result in your account currency. Positions held past the daily cut-off incur a financing charge or credit, known as a swap. Our guides to what a CFD is and swap and overnight financing go into detail.

Spread betting

In the UK and Ireland, many brokers also offer spread betting, which works economically like a CFD but is structured as a bet per point of movement. Tax treatment differs from CFDs and depends on individual circumstances, so it is worth checking the rules where you live rather than assuming.

Futures and options

Currency futures trade on regulated exchanges such as CME in Chicago. They have a central order book and transparent volume, standard contract sizes and fixed expiry dates. They are more common with professional traders, and some retail traders, particularly in the United States, use them because retail CFDs are not available to US residents.

Currency exchange for real money

If you actually need foreign currency, for a property purchase or business invoice, you use a bank or a specialist payment provider. That is a different world with its own pricing, and not what this site covers.

What your broker is doing in the middle

When you click buy, your broker either passes your order on to its liquidity providers, takes the other side itself, or does a mixture of both depending on the client and the trade size. These are known loosely as A-book (passing risk on) and B-book (keeping it). Each model has trade-offs, and neither is automatically good or bad, but the choice affects how your broker makes money and where its interests sit relative to yours. Our guides to how forex brokers make money and ECN, STP and market maker execution explain the differences.

What matters most for you is that:

• the broker is licensed by a credible regulator, and you have checked the licence on the regulator's own register (see how to check a broker licence);
• the costs are disclosed clearly, including spreads, commissions and swaps;
• client money is segregated from the firm's own funds;
• in the EU and UK, retail clients get negative balance protection, so you cannot lose more than the money in your account.

Our guide to choosing a forex broker walks through the full checklist.

A worked example: following one trade through the system

Here is an illustrative example, with made-up but realistic numbers, of what happens when a retail trader buys EUR/USD.

1. At 14:30 London time, banks are quoting EUR/USD at around 1.08500 / 1.08502 in large size on the top-tier platforms.
2. A retail broker's liquidity providers stream it a price of 1.08499 / 1.08503.
3. On a standard (spread-only) account, the broker adds a markup and shows the client 1.08494 / 1.08508, a spread of 1.4 pips.
4. The client buys one mini lot (10,000 euros) at the ask, 1.08508. The position is worth 10,850.80 US dollars.
5. Under ESMA rules, the maximum leverage for a retail client on a major pair is 30:1, so the minimum margin is about 3.33% of the position value, or around 361.69 dollars, set aside from the account balance (see leverage and margin).
6. The moment the trade is open, it shows a small loss: if the client closed immediately, they would sell at the bid of 1.08494, which is 1.4 pips lower. On a mini lot, a pip on EUR/USD is worth about 1 dollar, so that is roughly 1.40 dollars of cost.
7. If EUR/USD rises 30 pips by the evening and the client sells at the bid, the gain is about 30 dollars before swap. If it falls 30 pips, the loss is about 30 dollars. Relative to the 361.69 dollars of margin, either result is a move of more than 8%, from a currency move of less than 0.3%.

That last step is the point. Exchange rates for major pairs often move well under 1% in a day. Leverage is what turns those small moves into large swings in your account. Our guide to lot sizes and position sizing shows how to size trades so that a normal move does not do outsized damage.

Why exchange rates move

Over the long term, exchange rates are shaped by relative interest rates, inflation, growth, trade and capital flows, and confidence in a country's institutions. In the short term, they move on news and on the difference between what the market expected and what happened.

• Interest rate expectations. Money tends to flow towards higher expected returns, so changes in the expected path of rates matter more than the current level.
• Economic data. Releases such as US non-farm payrolls, inflation (CPI) and purchasing managers' indices move currencies when they surprise relative to consensus. See how economic data moves forex and how to use an economic calendar.
• Risk sentiment. In periods of stress, some currencies, traditionally the US dollar, the Japanese yen and the Swiss franc, have tended to attract demand, while currencies linked to commodities or growth have tended to weaken. These are tendencies, not rules, and they change.
• Flows. Big one-off transactions, such as a large cross-border takeover, or predictable ones, such as month-end rebalancing, can move prices without any change in the economic outlook.

None of these makes the market predictable in any reliable way. Professional traders with far more information than any retail trader still get direction wrong regularly. That is why risk management, not forecasting, is where most of the effort should go.

The trading week

Because forex is decentralised and global, it trades 24 hours a day on weekdays. The week opens on Monday morning in Sydney and Wellington, which is Sunday evening in Europe, and closes on Friday afternoon in New York. Over the weekend most broker platforms stop quoting, although the world does not stop producing news, which is why prices sometimes open on Monday some distance from Friday's close. That gap risk is one of the reasons to think carefully about holding positions over the weekend.

The day also has a natural reset point. Most of the industry treats 5pm New York time as the end of one trading day and the start of the next. That is when overnight financing (swap) is applied to open positions, and it is often a period of thin liquidity and wider spreads. The full picture is in our market hours guide.

Regulation: who oversees what

Because forex is OTC, there is no single global regulator for the market itself. Wholesale trading between banks is governed by banking supervision and by voluntary standards such as the FX Global Code. What retail traders deal with is the regulation of brokers, which is national or regional.

In the EU, brokers are authorised under MiFID II by national regulators, such as CySEC in Cyprus, BaFin in Germany or the AMF in France, and ESMA coordinates rules across the bloc. In 2018 ESMA introduced restrictions on CFDs sold to retail clients: leverage caps (30:1 on major currency pairs, 20:1 on minor pairs, gold and major indices, 10:1 on other commodities and minor indices, 5:1 on individual equities and 2:1 on cryptocurrencies), a 50% margin close-out rule, negative balance protection, and a standardised risk warning. These measures have since been made permanent by national regulators. The UK's FCA applies similar rules. Our guide to ESMA leverage limits and negative balance protection covers them in full, and our regulator registers page lists where to check a firm.

Common misconceptions

• "There is one true price." There is not. There is a consensus price range, and your broker's quote sits within or near it.
• "Big volume means easy money." High liquidity means low trading costs and smooth prices most of the time. It says nothing about whether you can predict direction. If anything, a deep, heavily traded market is a hard one in which to find an edge.
• "The market is rigged against retail." Individual brokers can have conflicts of interest, which is why regulation and transparency matter, but the global FX market is far too large for any retail order to matter to it. Most retail losses come from costs, leverage and behaviour, as covered in why most retail CFD traders lose.
• "24 hours means you should trade 24 hours." Liquidity and volatility vary a great deal through the day. Many hours are quiet and expensive to trade in.
• "Leverage is the same as buying power." Leverage lets you control a larger position with less margin. It does not change the size of the position's gains and losses relative to price. It changes how big they are relative to your account.

How to use this knowledge

Understanding the structure of the market changes some practical decisions:

1. Trade liquid pairs while you learn. Costs are lower and prices behave more smoothly.
2. Notice the time. Avoid opening trades in the thin hours around rollover or immediately before scheduled high-impact data, unless that is part of a tested plan.
3. Read your broker's documents. The order execution policy and costs disclosure tell you how your trades are handled.
4. Size for leverage. Use a fixed, small percentage of your account per trade. Our position sizing guide shows the maths.
5. Keep a journal. It is the only way to find out whether your results come from skill, cost or luck. See keeping a trading journal.

Unfamiliar terms are defined in the glossary, and our risk warning sets out the main risks of leveraged trading in plain language.

Frequently asked questions

Is the forex market regulated?

The market as a whole has no single regulator, because it is a decentralised over-the-counter network. Brokers that serve retail clients are regulated nationally or regionally, for example by CySEC in Cyprus, the FCA in the UK or ASIC in Australia. Always check that a broker is authorised on the regulator's own register before opening an account.

Who sets exchange rates?

In free-floating currencies, nobody sets them directly. Rates emerge from the buying and selling of dealers, institutions and companies. Some countries peg or manage their currency, and central banks everywhere influence rates through interest-rate policy and occasionally through direct intervention.

How do retail traders trade forex without exchanging currency?

Most retail traders use CFDs, rolling spot contracts or, in the UK and Ireland, spread bets. These track the exchange rate and settle the difference in your account currency, so you never hold the foreign currency itself. Futures on regulated exchanges are another route, particularly in the United States.

Why is forex open 24 hours a day?

Because it is traded in financial centres across time zones. As Sydney and Tokyo wind down, London opens, and as London closes, New York is in full swing. The market runs continuously from Monday morning in Asia to Friday afternoon in New York.

Is forex riskier than shares?

The currencies themselves often move less day to day than individual shares. What makes retail forex risky is leverage: with 30:1 leverage, a 1% move against you is a 30% loss of the margin committed. Brokers in the EU and UK must disclose the percentage of their retail CFD accounts that lose money, and it is typically well over half.

How much money do you need to start?

Many brokers accept small deposits, but the more useful question is how much you can afford to lose entirely without it affecting your life. Start with that figure, trade small sizes, and treat the early months as paying for an education rather than earning an income.