How the Forex Market Works
5 min read · By Trader X
The foreign exchange market is the largest and most liquid financial market in the world, with daily trading volumes exceeding $7.5 trillion. Unlike stock exchanges, the forex market operates as a decentralized over-the-counter (OTC) network, meaning there is no single physical exchange. Instead, trading occurs electronically between banks, financial institutions, corporations, governments, and retail traders across a global network.
The forex market operates through a tiered structure. At the top sits the interbank market, where major global banks trade directly with each other in massive volumes. Below that, prime brokers and liquidity providers aggregate prices and distribute them to retail brokers. Retail traders access the market through their brokers, who either pass orders to liquidity providers (STP/ECN model) or act as counterparties (market maker model).
Prices in the forex market are determined by supply and demand dynamics. When more participants want to buy a currency or commodity like gold, the price rises. When selling pressure dominates, prices fall. Economic data releases, central bank decisions, geopolitical events, and market sentiment all influence the balance between buyers and sellers, creating the price movements that traders seek to profit from.
This lesson is general education only and is not investment advice.