What is Forex? Breaking It Down Without Myths and Misconceptions

The Forex market (Foreign Exchange Market) is the largest financial market in the world, where currencies are traded. The daily Forex turnover exceeds $7.5 trillion (according to BIS, 2022), making it the most liquid trading platform for both institutional investors and retail traders.

However, many beginners have a common misconception: they believe that trading stocks, gold, or oil with leverage at a "Forex broker" is also Forex. This is incorrect. Let’s clarify what Forex really is and how it differs from other financial markets.

---

Forex = Only Currencies

Forex is a market for currency pairs, where one currency is exchanged for another. Some of the most popular instruments include:

• EUR/USD – Euro vs. US Dollar
• USD/JPY – US Dollar vs. Japanese Yen
• GBP/USD – British Pound vs. US Dollar
• USD/CHF – US Dollar vs. Swiss Franc

Currency prices on Forex fluctuate based on supply and demand, which are influenced by economic news, central bank policies, macroeconomic indicators, and global events.

💡 Important: Forex does not include stocks, oil, gold, indices, or cryptocurrencies. If a trader opens positions in these assets with a "Forex broker," they are actually trading CFDs (Contracts for Difference), not Forex.

---

Why Forex is Not the Same as CFDs?

CFDs (Contracts for Difference) are a completely different financial instrument that allows traders to speculate on the price movements of various assets without actually owning them.

📌 Key Differences Between Forex and CFDs:

Feature	Forex	CFD (stocks, oil, gold, indices)
What is traded?	Only currency pairs	Stocks, commodities, crypto, indices
How prices are determined?	Interbank market	Broker’s price quotes (OTC market)
Fees	Spread and swap	Spread, commission, swap
Where is it traded?	Decentralized market (banks, market makers)	OTC market (CFD provider)
How it works	Direct exchange of one currency for another	Speculation on price differences

If a broker offers trading Tesla stocks, gold, oil, or the S&P 500 index with leverage, it is not Forex but CFD trading.

---

How Does the Forex Market Work?

Forex is a decentralized interbank market, operating without a central exchange. Transactions take place through a network of banks, market makers, financial institutions, and retail brokers.

📍 Forex operates 24 hours a day, five days a week and consists of different trading sessions:

• Asian Session (Tokyo, Singapore) – low volatility.
• European Session (London, Frankfurt) – high liquidity.
• American Session (New York, Chicago) – most volatile.
• Pacific Session (Sydney, Wellington) – least active.

Forex is used not only by traders but also by banks, hedge funds, multinational corporations, and central banks for currency interventions.

---

Who are the Main Players in Forex?

Forex is not just a trading platform for speculators; it plays a key role in the global financial system. The main participants include:

✔ Central banks (Federal Reserve, ECB, Bank of Japan) – regulate monetary policy, impacting currency values.
✔ Commercial banks – execute foreign exchange operations and provide liquidity.
✔ Institutional investors – hedge funds, corporations, and insurance firms managing currency risks.
✔ Retail traders – individuals trading through Forex brokers.

Forex remains dominated by institutional players, but leverage makes it accessible to retail traders.

---

Conclusion

📌 Forex is strictly a market for currency pairs. If a trader buys gold, oil, or stocks from a "Forex broker," they are actually trading CFDs, not Forex.

📌 Forex is a decentralized market where transactions occur through banks and market makers. It operates 24/5 and has high liquidity.

📌 The major players in Forex are central and commercial banks, corporations, and hedge funds. Retail traders represent a small portion of the market.

 

Forex remains one of the most popular markets, but understanding its mechanics is essential to avoid falling into myths and misconceptions.