Forex or Foreign exchange market is a decentralized market for the trading of currency pairs, which is also the largest and most liquid market globally. Forex market participants are setting the foreign exchange rates for currency pairs on this market by their demand and supply of currencies, which they need for business, speculation, or other reasons. Currencies are traded at Forex at specified quantities, which are called lots. A standard lot is worth 100 000 of the given currency, but traded are also smaller amounts as 10 000 called mini lot or 1 000 called micro lot. There are also specified names for currency pairs “quotes” like EUR/USD or USD/JPY where the currency on the left is called the base currency, and the currency on the right is the quote currency. Quote currency represents the reference of the value of one base currency. Therefore if the currency rate EUR/USD is 1,0914, it means that 1 EUR costs 1,0914 USD.
Participants can buy or sell every currency which possesses some floating regime which means they are tradeable. Because of the floating regime, currency pairs can be more or less volatile, which depends on the economic stability of the currency domestic country, traded volume, large cross border M&A deals, or many more factors that could affect the currency value. Market participants can trade currencies at the spot market, where their trades are settled immediately in situations when they need foreign national currency, or they can execute forward transactions or futures which are settled in a future date that is often used as a hedge.
On Forex, there have been developed many strategies which are now differentiated and cover I would say almost every situation, that happens on the market. For example, strategies can use attributes of the economy which currency represents like in FX Carry Trade, which sells low-interest-rates currencies and buys high-interest rates currencies trying to capture the spread between the rates.
But strategies could also make use of common factors like momentum, volatility effect, or mean reversion, which are present in almost every asset class. The strategy which uses one of the abovementioned factors is Currency Momentum Factor. It is based on trend following strategy (momentum), where the strategy buys the currencies which have performed well in the past and sell the currencies which have performed bad.
