There are 180 currencies in circulation across the globe but not all are actively traded in the forex market. Only those currencies that have liquidity and show economic and political stability are traded. The forex market determines the exchange rate between the world’s currencies. Open 24 hours a day, 5 days a week, the forex market is also the largest financial market worldwide in which currencies are traded. The forex market is decentralised and is used by traders in countries all over the world to speculate on the price movements of currency pairs. This market sees a daily trading volume of US$6.6 trillion making it the most liquid financial market globally.
Most forex trades or payments are made in US$, Euro, British pound (GBP), and the Japanese yen (JPY). Other currencies traded include the Swiss franc, Canadian dollar (CAD), the Australian dollar (AUD), and the New Zealand dollar (NZD).
Bear market vs bull market
The terms bear and bull typically describe the state of a market at a particular time (i.e., market conditions). A bear market is one that shows a decline among currency prices, typically because of global events like political or financial crises, war, and environmental disasters. A bear market is usually characterised by risk averse investor behaviour. Bear markets come in all sizes and may last for any period. In contrast, a bull market is one that performs more optimistically, with currency prices usually taking an upward trend. A bull market typically sees a rise in investor confidence, and a more positive outlook of the forex market by traders.
Price movements in the forex market
Forex market fluctuations mostly come about because of economic trends and geopolitical instabilities. This includes international trade, inflation, political news and events, rates of employment (or unemployment), manufacturing indexes, the state of global capital markets natural disasters, and more. As a result, forex traders must stay informed on the global financial and political climate that may cause unexpected price movements and impact the success of their trades.
Who trades forex?
The forex market attracts a variety of different types of traders and larger institutions like hedge funds, central banks, investment managers, commercial banks, investment banks and individual investors. This volume of players in the forex market and the number of daily trades they execute is what makes it so highly liquid.
What are 5 of the most popular traded currency pairs?
All forex currencies are listed and traded in pairs. Forex traders speculate on the price movements of currency pairs, i.e., the increase or decrease in value of one currency vs another. Five of the most actively traded pairs (known as the majors) are:
- EUR/USD (euro/US dollar)
- USD/JPY (US dollar/Japanese yen)
- GBP/USD (British pound/US dollar)
- AUD/USD (Australian dollar/US dollar)
- USD/CAD (US dollar/Canadian dollar)
Other popular currency pairs include GBP/EUR, USD/CHF, and NZD/USD.
The first currency in a currency pair is called the base currency. The currency listed next to it is referred to as the quote currency. In other words, in a GPB/USD currency pair, the base currency would be GBP and the quote currency is USD.
A trader looks to a currency pair to establish how much quote currency is required to buy a unit of base currency, i.e., currency pairs indicate the value of the base currency relative to the quote currency in the specific pair. Currency pairs have a bid price and an ask price. The price at which the trader is willing to sell the base currency is the bid price. In contrast, the ask price is the lowest price at which a trader can buy a base currency.
Why are major pairs so actively traded?
For one, major pairs usually have more volume, with smaller spreads between the bid and ask price appealing to most traders. This in turn keeps the volume consistently high. Further, traders can open and close trades more easily with volume, and with bigger position sizes. High volume also means traders may be more inclined to buy or sell at a given time as well. Consequently, the risk of slippage potentially becomes smaller but does not altogether disappear so caution should always be exercised to avoid losses.
Contracts for Difference (CFDs)
CFDs can be used to trade currency pairs. In the world of forex, a CFD is an agreement between a forex trader and a CFD forex broker to exchange the difference between the opening and closing price of an asset. The CFD forex broker earns a profit through spreads. CFDs are derivative products enabling the trader to speculate on financial markets without having to take ownership of the underlying assets. CFDs are also leveraged products enabling a trader to open a trade by paying just a margin of a contract’s value. Leverage is however very volatile and how much leverage a forex trader uses to open trades is usually based on the level of risk they’re prepared to incur. If not properly managed, leverage can see the trader losing large amounts of capital.
Becoming a successful forex trader
If you are now starting your forex trading journey, learning as much as you can about how to trade, understanding currency trends, adopting a trading style suited to you, and developing a trading strategy that will help you achieve your trading goals are key.
Key steps before trading forex on a live account
- Get educated. Read everything you can to gain the knowledge you need to make better-informed trades.
- Participate in workshops and listen to webinars or YouTube videos. Learn from the professionals. Acquire crucial insights and useful tips from them. Watch YouTube videos and listen to forex webinars.
- Open a demo account with a reputable CFD forex broker and practise your trades in a trading environment that has been designed to simulate real-life trading scenarios. Implement your forex trading strategies and see the outcomes. Establish your risk tolerance levels and open trades according to the risk you’re willing to take.
- Once you’ve practised for a significant period of time, switch to a live account and put all your learning into practice.
