How the Forex Market Works

The short answer

Forex is the market where one currency is exchanged for another. It has no single building and no single exchange. Banks, brokers, funds, companies and central banks trade with each other directly, over computer networks. Prices come from all of these deals together.

If you are asking "forex trading kaise hota hai", here is the basic idea. A retail trader sees a price for a currency pair such as EUR/USD on a platform. That price comes from a chain of institutions. The trader's order goes back along part of that chain or is handled by the broker itself.

For the basics of currencies and pairs, see What is forex and Currency pairs.

No central exchange: an OTC market

Forex is an over-the-counter (OTC) market. Each trade is a private agreement between the two sides, not a match on a public order book.

This has practical results:

• There is no single official price. Different dealers can show slightly different quotes for the same pair at the same moment.
• Each side carries counterparty risk. This is the risk that the other side of a deal fails to pay or deliver.
• Volume is spread out. It is split across many venues, so no one sees the whole market.

A stock exchange such as the PSX works differently. Orders meet in one central order book with published rules. The comparison is covered in OTC vs exchange.

The interbank tier

At the top are large banks that deal currencies with each other in large amounts. This layer is called the interbank market. These banks act as dealers: they quote a price to buy (bid) and a price to sell (ask) at the same time. They earn from the gap between the two and from managing the positions they hold.

Interbank trading runs through electronic dealing platforms and direct bank-to-bank lines. Access depends on credit relationships. A bank deals only with a party it has agreed to give credit to. Smaller institutions cannot join this tier directly and reach it through a larger bank. Who else takes part is covered in Market participants.

Liquidity providers

A liquidity provider (LP) is a firm that stands ready to quote bid and ask prices and take the other side of trades. Large banks are the classic LPs. Non-bank market-making firms also play this role.

Liquidity means how easily you can trade a given size without moving the price much. The more LPs compete on a pair, the tighter and more stable the quotes usually are. See Liquidity.

A broker or a smaller institution often connects to several LPs at once. Software called an aggregator collects their quotes and builds one combined price feed. It usually shows the highest bid and the lowest ask on offer.

How a quote reaches a retail platform

The path from the market to your screen usually looks like this:

1. LPs stream quotes. Banks and market makers send bid and ask prices, each valid for a certain size, many times per second.
2. The broker aggregates them. The broker's system combines these feeds into one price per instrument.
3. The broker applies its pricing. It may add a markup to the spread or charge a separate commission, depending on the account model.
4. The platform displays it. The final bid and ask appear in a trading platform such as MetaTrader 5, along with the chart built from those prices.
5. Your order is handled. When you click buy or sell, the broker fills the order. It either takes the other side itself or passes the risk on to an LP.

Step five depends on the broker's execution model:

• Market maker: the broker acts as the counterparty.
• STP (straight-through processing): the broker routes the order to LPs.
• ECN-style: the broker gives access to a network of competing quotes.

Details are in Broker execution models and What a broker does.

Most retail forex products are CFDs (contracts for difference). A CFD is a contract on the price change. You do not take delivery of the currency itself. See What is a CFD.

Bid, ask and spread along the chain

Every price in forex has two sides:

• Bid: the price at which you can sell.
• Ask: the price at which you can buy.
• Spread: the gap between the two. It is a cost you pay when you open a trade.

Spreads tend to widen when liquidity is thin, when big news comes out, and around the daily rollover. The price you get can also differ from the price you saw, especially in fast markets. That difference is slippage.

Read more in Bid and ask, What is spread and Slippage.

The weekday cycle

Because there is no central exchange, trading follows the business day of major financial centres. It moves from Asia-Pacific to Europe to North America, and then the cycle starts again. As a result, the market runs around the clock on weekdays and closes over the weekend.

Activity is not even through the day:

• Session overlaps: when the hours of major centres overlap, more participants are active and spreads are often tighter.
• Quiet hours: when only one smaller centre is open, liquidity is lower.

At the end of each trading day, open positions are rolled over. On leveraged products this can bring a swap charge or credit. See Rollover.

Over the weekend, interbank dealing stops but news does not. Prices can therefore open on Monday away from Friday's close, which is called a gap. A stop loss order may then be filled at a worse price than its level.

Exact hours in Pakistan time are on Trading sessions and Session overlaps. For weekends, holidays and gaps, see Weekends and holidays and Price gaps.

What moves the prices

Currency prices change as supply and demand change. The main drivers are:

• trade and investment flows;
• interest rates;
• inflation data;
• central bank decisions;
• political news.

Interest rates matter a lot because they affect what holders of a currency earn. As a local example, the latest recorded State Bank of Pakistan decision is: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Background is on SBP rates and economy and Fundamental analysis.

Where Pakistan residents stand

Knowing how the global market works is different from being allowed to use every part of it from Pakistan. Official positions include:

• Per the State Bank of Pakistan, remitting foreign exchange to overseas forex, margin or CFD platforms is not allowed: per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)).
• Also, buying such products breaks the law: per the SBP, the purchase of offshore forex/margin/CFD products by Pakistani residents violates section 4(1) of FERA 1947.
• On offshore platforms, per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse.

Read Law and regulators before you open any account, and take your own legal advice where needed.

Risk

Retail forex is usually traded with leverage. Leverage means a small deposit controls a much larger position. It increases losses as much as gains. Leveraged CFD and forex trading can lose money fast, and gaps or slippage can make losses larger than planned.

A demo account lets you see how quotes and orders behave without real money; see Demo vs live. See also Why traders lose and Risk management.

Frequent questions

Who sets the forex rate?

No single body. Prices come from quotes and deals between banks, liquidity providers and other participants. Central banks influence rates through policy and sometimes trade themselves.

Is the price on my platform the "real" market price?

It is your broker's price, built from its liquidity feeds plus any markup. It should be close to other dealers' prices but may not match them exactly, because forex has no single official price.

Why is forex open at night but closed on weekends?

Trading follows business hours in financial centres around the world, which together cover the whole weekday. Over the weekend these centres stop dealing.

What is the difference between the interbank market and retail forex?

The interbank market is large dealers trading with each other on credit lines. Retail traders usually trade CFDs through a broker, which prices them from interbank and LP quotes.

Does my order go to the interbank market?

It depends on the broker's execution model. A market maker may fill it internally. An STP or ECN-style setup routes it to liquidity providers.