February 10, 2017
The foreign exchange market, also called forex or FX for short, is the biggest financial market in the world, with a daily turnover of around $5 trillion — that is $5,000 billion in a single day! It dwarfs all other markets by size, and is one of the most exciting markets for investors. The main participants in the forex market are large banks and other institutional investors, but with technological innovation in the last 20 years, the market became accessible for smaller retail investors as well. Today, all you need to participate in this exciting market brimming with money making opportunities, is a computer with internet access, a broker account which you open online, and this forex tutorial, which will cover all the basics to start trading.
Major World Currency Pairs
As you probably already assumed from the name, the foreign exchange market is where traders go to trade the world’s currencies. There are many currencies around, but just a few are considered the major currencies. Namely, there are eight most traded currencies in the forex market. These are:
- U.S. dollar (USD)
- British pound (GBP)
- Euro (EUR)
- Japanese yen (JPY)
- Swiss franc (CHF)
- Australian dollar (AUD)
- New Zealand dollar (NZD
- Canadian dollar (CAD)
As you can notice, all the listed currencies are from developed economies, as they make up the highest share of the world trade, which makes their currencies the most traded in the world.
Simply said, like in all other markets, the traders in the forex market try to buy a currency cheap and sell it later at a higher price. But, what’s unique about the forex market, (and the reason why so many traders decide to invest in it) is it’s also possible to make a profit when the price goes down – we will explain this later. For now, let’s focus on the process of the actual buying of currencies in the forex market.
You have probably already noticed that all currencies are quoted in currency pairs. That is, the quote represents the price of one currency in the second currency. These are called the base currency, and the counter currency. For example, a quote of EUR/USD of 1.10 means that 1 euro buys 1.10 U.S. dollars. Here, the euro (EUR) is the base currency, and the U.S. dollar represents the counter currency. A rise of the quote of EUR/USD to 1.20, means that now 1 euro buys 1.20 U.S. dollars. In this situation, the euro became stronger and the dollar weaker. The goal of a forex trader is to anticipate the rise (or fall) of a currency’s value, in order to buy or sell that currency. In the mentioned example, a forex trader would like to buy the euro for $1.10, and then sell it for $1.20.
Usually, currency pairs don’t fluctuate that much. Most pairs move less than 1% daily, making forex one of the least volatile financial markets. On the other side, liquidity is extremely deep. If you decide to buy or sell currency, it will take you milliseconds to do so. That’s why relatively high leverage is available on forex, which increases the value of potential gains from small movements, but also increases the risk of higher losses.
No Centralized Trading Locations
Forex is an over-the-counter market, with no centralized location for trading currencies. Instead, currencies are traded in financial centers around the world, like New York, London, Frankfurt, Tokyo and Sydney. This means, the market is open 24-hours a day, and you can trade around the clock. This is perfect for those looking to trade after your day-job, or before going to sleep! A market will always be open somewhere – in North America, Europe, Asia or Australia.