Simply put, forex is a financial market that allows trading currencies globally. If traders believe that a currency will be stronger in value than its pair and if this is indeed the case in the end, then they generate revenue. If someone has ever travelled abroad, then they probably had to exchange their local money for the currency of the country they visited.
In such a case, you will notice there are different exchange rates for various currencies. An exchange rate refers to the relative price between the two different currencies. Taking a real-life example, if someone from America visits Japan, then they will need to sell dollars to buy yen. When they return back, they will probably exchange the remaining yen, if any, for dollars again. Here, they might notice that the exchange rate has changed.
This change in exchange rates is what most traders are attracted to when it comes to trading forex. When people exchange one currency for the other, they are essentially participating in the forex market. The CFD forex broker is usually the mediator between the trader and the market.
What is forex?
Forex, or foreign exchange is considered the largest market worldwide. In fact, it is a decentralised market where online forex trading occurs over the counter (OTC) between participants electronically rather than on one central location. This means that traders can trade anywhere, anytime as long as they are connected to the internet. The majority of transactions occur for speculative reasons, meaning that traders buy CFD’s on currency pairs in the hope that their value will increase so they will be able to benefit by selling them at a higher price later.
Interestingly, the foreign exchange market has a $6.6 trillion daily trading volume, making it the most liquid market worldwide. Also, the market is open 24 hours a day, 5 and a half days a week.
What is important here is that if the market closes in one country at the end of each day, it opens in another because there are different time zones around the world. As a result, there is always someone willing to buy or sell, making it the most actively traded market globally. The biggest financial centres in which trading forex online occurs include Sydney, Singapore, Hong Kong, London, New York, Frankfurt, Tokyo and New Zealand.
What does currency trading involve?
As already discussed, trading forex online involves buying one currency while selling another at the same time. Traders trade on currencies through online forex trading brokers. Currencies are traded in pairs and are quoted in relation to another currency. They are also presented as three-letter symbols, in which the first two letters usually show the name of the specific currency’s country, while the third letter usually shows the name of the country’s currency.
The currency’s price usually reflects the market’s opinion on the present and future health of its underlying economy.
If we take the U.S dollar and the British pound example, the currency pair would be USD/GBP. “US” refers to the United States while “D” refers to “dollar”. Likewise, “GB” stands for Great Britain while “P” stands for Pound.
Types of currency pairs
There are three main categories regarding currency pairs when trading forex online. These are:
Majors
These currencies are called major because they are the most frequently traded currencies, representing some of the largest economies around the world. USD, EUR, GBP, JPY and CHF are considered major currencies. Another common characteristic here is that all major currency pairs include the USD.
Moreover, there are more fluctuations in these currencies’ prices which provide more trading opportunities. They are also the most liquid which refers to how actively they are traded within the market.
Crosses
Crosses, on the other hand, do not include the U.S dollar. If, however, a currency pair includes any of the two major currencies in a currency pair, besides USD, are called crosses or cross-currency pairs. These are also known as minors. Crosses are also liquid, providing numerous opportunities to traders. EUR, JPY and GBP are the most heavily traded cross currencies.
Exotics
An exotic currency refers to a currency from an emerging market (EM). In other words, exotic currency pairs are the ones that include a major currency and one currency from a developing market. Such markets are Brazil, Chile, Mexico, Hungary or Turkey. Exotic pairs are not frequently traded compared to the other two categories.
Therefore, there are bigger transaction costs associated with these pairs. Also, since they are pairs with lower liquidity, exotics have the tendency to be impacted by economic or geopolitical events more easily.
Many online forex brokers provide numerous currency pairs, so traders usually have ample options to choose from based on their trading needs and preferences.
