How the Forex Market Works: Who Trades, How Prices Form, When It Opens

The forex market is a worldwide network of banks, brokers, companies, funds and central banks. They swap one currency for another directly with each other, and there is no central exchange. Prices come from supply and demand and are quoted as pairs like EUR/USD. Trading runs 24 hours a day, from Sunday evening to Friday evening US Eastern Time (ET), as the sessions pass from Sydney to Tokyo, London and New York.

This matters before your first trade. Get it wrong and you pay a wider spread than you need to, trade a thin market, or deposit with a broker whose soundness you never checked.

Forex is a network of dealers, not one exchange

Forex is short for foreign exchange, which means swapping one currency for another. You did it already if you ever changed money at an airport. Companies, banks and governments do the same thing in much larger amounts. The Bank for International Settlements surveyed the market in April 2025 and found average daily turnover of about $9.6 trillion, 28% more than in its April 2022 survey.

A stock market has one exchange and one central order book. Forex has neither. It trades over-the-counter (OTC): banks and dealers quote prices to each other and deal directly over electronic links. The core of this network is the interbank market, where large banks trade with each other. The picture below shows how the pieces connect.

The forex market as an over-the-counter network with no central exchange

Since every dealer sets its own quote, two brokers can show slightly different prices at the same moment. That is normal in an OTC market and is not a warning sign on its own. The prices stay close because any dealer quoting far from the rest would quickly be traded against by the others.

Who trades forex, and why each group matters to price

Forex market participants trade for very different reasons. Most of the volume comes from businesses and institutions, not from retail traders like you.

Much of this activity is not a simple "buy euros now". The largest single instrument is the FX swap: you exchange two currencies today and agree to swap them back on a later date. It is ahead of spot trades (an exchange at today's price, settled within a couple of business days) and outright forward contracts (one exchange at a rate fixed today for a future date). Banks and companies use swaps and forwards to manage cash and lock in rates. The price on your chart is the spot rate.

How a forex price is quoted: currency pairs, bid and ask

Currencies always trade in a currency pair, because buying one means selling another. In EUR/USD, the first currency (EUR) is the base currency and the second (USD) is the quote currency. A price of 1.1000 means one euro costs 1.1000 US dollars.

Every quote has two prices. The bid price is what you get when you sell. The ask price is what you pay when you buy, and it is always the higher one. The gap between them is the bid-ask spread, and you pay it on every trade. The quote below is the one used in the worked example.

A EUR/USD quote with the bid, the ask and the spread between themIllustration

A common misread: the price of one unit tells you nothing about how "strong" a currency is. Some currencies cost more per unit than the British pound, and others need thousands of units to buy one dollar. That only reflects the size of each country's unit. What you trade is the change in the rate, not its level.

Worked example: one trade from open to close

The figures here are an illustrative example. Say EUR/USD is quoted at 1.1000 bid and 1.1002 ask. You think the euro will rise, so you buy 10,000 euros, which is one mini lot. Buying first is called going long.

You buy at the ask, 1.1002. If you closed straight away you would have to sell at the bid, 1.1000. That puts you $2 down the moment you open (0.0002 × 10,000). Before you are back to breakeven, price has to rise by the size of the spread.

Later the quote reaches 1.1032 bid and 1.1034 ask. The chart below tracks the bid from your entry to your exit.

EUR/USD bid rising from 1.1000 to 1.1032 during the example long tradeIllustration

You close by selling at the bid, 1.1032:

Profit on a 10,000-unit EUR/USD long, bought at 1.1002 and sold at 1.1032

Cost to buy at the ask10,000 × 1.1002= $11,002

Received when selling at the bid10,000 × 1.1032= $11,032

Difference$11,032 - $11,002= $30

Of which spread cost (already included)10,000 × (1.1002 - 1.1000)= $2

Result after closing+$30

The $30 is already net of the spread, because you bought at the ask and sold at the bid. There is nothing more to subtract.

The $11,002 is the full value of the position, not the money you need in your account. With a retail broker you put up only a deposit, called margin, and leverage lets that deposit control the full 10,000 units. Your profit or loss is still worked out on the full position, so the $30 is the same whether your deposit is large or small. If your deposit were a few hundred dollars, a $30 loss would be a large share of it. Leverage makes gains and losses large compared with the money you put in.

In the same example, suppose the bid had dropped to 1.0972 instead. You would sell at 1.0972, and 1.0972 - 1.1002 = -0.0030. Multiplied by 10,000, that is a $30 loss. A short trade works the other way round: you sell first at the bid and buy back later at the ask.

Units change the scale. With a micro lot (1,000 units), the same 0.0030 move is worth 0.0030 × 1,000 = $3 instead of $30.

Who takes the other side of your trade

Every trade needs a counterparty. When you click buy, someone sells to you. For a retail trader, that someone is decided by your broker's business model.

A market maker broker is the counterparty itself. It quotes its own bid and ask, fills your order from its own book, and may hedge part of its exposure with banks. Other brokers pass your order on to a liquidity provider, meaning a bank or trading firm that streams prices. Those brokers earn from a markup on the spread or from a commission.

Who takes the other side of your trade with a market maker broker and with a pass-through broker

Many brokers mix both models. Neither one is automatically safe. Licensing by a recognised regulator and client money held apart from the broker's own money matter more than the model. The broker's order execution policy says which model it uses.

One part of the currency market does have an exchange. Currency futures at CME Group are standardised contracts cleared centrally through the exchange's clearing house, which stands between buyer and seller and protects each side if the other fails to pay. A spot trade with your broker is settled only between you and that broker, so the broker's soundness is your counterparty risk.

When the forex market opens and closes

The trading week opens at about 5 PM ET on Sunday, when Sydney starts. It closes at about 5 PM ET on Friday, when New York finishes. In between, traders split each day into four forex trading sessions, named after the financial centres whose banks are active. Roughly, in ET: Sydney 5 PM–2 AM, Tokyo 7 PM–4 AM, London 3 AM–12 PM and New York 8 AM–5 PM. Countries change their clocks on different dates, so these times shift by about an hour for parts of the year.

The chart below sets out the sessions across one trading day, from Sunday evening to Monday evening.

The four forex sessions on a 24-hour clock in Eastern Time, with the London–New York overlap highlighted

The London and New York sessions overlap from about 8 AM to 12 PM ET. That window has the highest volume and liquidity of the day, because European and North American banks are both trading. Tokyo and London overlap only briefly, around 3–4 AM ET for parts of the year, and that overlap is much less active.

Busy and quiet hours feel different. In busy hours many dealers are quoting, so spreads tend to be tighter and price moves more. In the quiet stretch after New York closes, fewer dealers are quoting, so spreads widen and price can jump between levels. At the weekend there is no trading at all, and Sunday's first price can open some distance from Friday's close. That jump is called a gap. If Sunday opens beyond your stop, the stop is filled at the first available price, which can be much worse than the level you set.

A weekend gap: EUR/USD opens on Sunday away from Friday's closeIllustration

Every weekday at about 5 PM ET, New York closes and the trading day rolls over to the next one. This is the rollover. For a few minutes many dealers step back, liquidity drops and spreads often widen sharply. It is also when overnight financing, called swap, is charged or paid on positions you keep open. This is a different thing from the FX swap instrument above. Brokers just use the same word.

Remember which price triggers your stop. A long position's stop is hit by the bid, and a short position's stop is hit by the ask. A wider spread can therefore close a short even when the bid on your chart barely moved. If your stop is only a few spreads away from price, close the trade before 5 PM ET or move the stop further away with a smaller position. Do not open new trades in the minutes around rollover.

A simple rule: trade a pair when its home banks are open. EUR/USD and GBP/USD are most active in London hours and the London–New York overlap. If you can only trade during Asian hours, pairs with JPY, AUD or NZD are the ones whose home markets are active then.

What moves exchange rates

A rate rises when more people want to buy that currency than sell it. Everything else works through that supply and demand.

Interest rates are one of the biggest drivers. When markets expect a central bank to raise rates, holding that currency pays more, so money tends to flow in. This is why central bank meetings and speeches can move a currency within seconds.

Economic data moves price through surprise, not through the number alone. If an employment report comes in strong but the market expected even stronger, the currency can fall. Before a release, look at the forecast as well as the previous figure.

How a strong economic report can still make a currency fall when it misses the forecast

Large real-world flows matter too. These include a company converting foreign earnings, a fund buying foreign bonds, or a central bank stepping in. In nervous markets, money tends to move toward currencies seen as safer.

Beginner mistakes that cost money, and how to avoid each

The spread, quiet-hour, rollover and weekend-gap rules above prevent the first costly mistakes. Three more catch beginners:

• Trading straight into a rate decision or a major data release. Check the calendar before you open a trade. If a big event is due, either stay out or size the trade so that a sudden jump is a loss you can afford.
• Not knowing who is on the other side of your trade. Before you deposit, confirm the broker's regulator and read its order execution policy.
• Starting with positions that are too large. Choose your size from what you could lose, never from what you hope to make.

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