Foreign exchange, or simply known as Forex represents the biggest exchange and financial market on the globe. It essentially involves the buying and selling of currencies at the same time. Currencies are traded in pairs, such as the Euro and US dollar (EUR/USD). The Forex market is the biggest financial market in the world, which has a variety of participants ranging from big banks, governments, corporations to individual investors. Individual investors can trade currencies through Forex brokers or through banks. The average daily trading volume in the Forex market is a little less than 2 trillion USD.

The top currency traders are big international banks like Deutsche Bank, UBS AG, Citigroup, Barclays Capital, Royal Bank of Scotland, HSBC, and Bank of America. The individual investors represent a very small percentage of the total Forex volume (according to some estimates less than 2% of currency trading is done by individual currency traders).

There are many reasons why currencies are bought and sold. About five percent of the turnover comes from governments and business entities that purchase and sell services and products abroad. The remaining percentage of the trading is done for profit or classifies as speculation. The most liquid currencies are those that are commonly traded. More that 85 percent of all the transactions on Forex involve the following currencies: the US dollar, Australian dollar, Canadian dollar, Japanese Yen, Swiss Franc, and British pound.

Forex trading starts in Sydney, followed by other cities around the world, depending on the time zone. Unlike other financial markets, investors can react to the fluctuations at any time of the day. Transactions can be made via electronic networks or over the phone.

In Canada, Forex quotes should be examined in view of the fact that the first currency is what is known as the base currency. The value of the base currency is always pegged as one. The Canadian dollar, for example, is expressed as $1 because it is considered a major currency. It is the value of the second currency in the pair that is adjusted. For example, the quote of the Canadian dollar and Japanese Yen is CAD/JPY 120.01. This means that one dollar equals 120.01 yen.

When the Canadian dollar is the base unit and the currency goes up, it means that it has appreciated in value. Consequently, the second currency is weakened. The dollar is able to buy more of the other currency. However, it should be noted that there are three exceptions to this rule. They are the British pound, Australian dollar, and the Euro. In these currencies, the Canadian dollar cannot be used as a base rate since it takes more than one dollar to equal a pound, euro, or Australian dollar.

Spreads is an important concept in Forex trading. There is always a two sided dealing price given where the currency can be bought or sold. The difference between the buying and selling price is the spread. In the two-sided quote, the “bid” is the price at which the base currency can be sold while the “ask” is the price at which the base currency can be bought.

There are factors that influence the currency prices, which can range from economic to political conditions. Interest rates, inflation rates, and how stable the country is have a strong impact. Governments can exert influence on the value of their currencies by participating in Forex trading. This is what is known as the Central Bank Intervention. They are able to achieve that by flooding the market with their currency in order to lower the price. Inversely, they can buy their currencies to boost the price. Any of these factors can alter the prices of the currency.