Forex (stands as a foreign currency exchange) is the most liquid market and the largest global arena for the trading of currencies. It is open 24 hours, five days a week. Its turnover more than 4 trillion dollars a day and this figure significantly exceeds any other market in terms of the size and liquidity. The Forex market works through various financial institutions. Most foreign exchange dealers are banks with a few insurance companies involved.
Just 3 decades ago, Forex market was operated by these institutions: central banks of the different countries, transnational banks, several insurance companies and etc. Therefore, trading on global financial markets was inaccessible for most of the people or retail traders. Because, it required millions of dollars to go to the exchange and make deals with other traders. Forex was originally intended to be used by bankers and large institutions, and not by retail traders. However, due to the development of internet, new category, Online Forex brokers has emerged that enabled any individual, notwithstanding the size of their capital to access Forex market.
Forex is a decentralized market, meaning that it has neither precise location nor unified data centre and there is no middle ground for facilitating trades. A decentralized market uses a network of market makers that deals during the trading sessions. The Forex market is a leading example of a decentralized market where the transactions are not normally conducted on a major exchange like the NYSE/NASDAQ or CME.
As the forex market is decentralized, it is the largest banks around the world that are considered as the biggest players on the market and they have a huge impact on exchange rates. These banks are making enormously huge amounts of transactions every day for their consumers and themselves. The biggest banks include: JPMorgan(JPM), Barclays(BCS), Deutsche bank (FIEG), Citi(C) and HSBC(HSBC).
Governments and Central banks such as the Federal Reserve, European Central Bank, Bank of England, are regularly involved in the forex market. Because monetary policy is one of the major mechanisms that allows governments to maintain the stability of their currency. To decrease the inflation rate Central Banks may use their fund reserves to purchase their national currency and when necessary to stimulate the export they may increase the inflation rate, so products that are manufactured in the given country might become more affordable to the foreign buyers.
Various world currencies, grouped into pairs are traded on Forex market. For example, the Euro versus the US Dollar (EUR/USD). One of the currencies acts as a commodity, the other one is a tool for paying for this product. The profit from trading is generated due to the currency exchange rate change to one of the directions as the time goes by.
Here is a list of the major currencies:
|USD||United States||Dollar||Buck, Greenback, Reserve Currency|
|EUR||Euro members||Euro||Fiber, Unified Currency|
Forex trading is essentially the buying of one currency and the simultaneous selling of another. Therefore, when trading currencies we will always see them quoted in pairs.
When placing a trade, we are speculating on which currency we believe will become stronger or weaker against the other with the goal of making a profit from the exchange rate movement.
The currency to the left is called the base currency. The currency to the right is called the quote the currency. The quote currency tells us how much it is worth against 1 unit of the base currency. So, if we say the EUR/USD is trading at 1.3000 it means 1 Euro equals $1.30.
The base currency is the basis for the buy or the sell trade. If we believe that the Euro will strengthen against the dollar, we would buy the EUR/USD pair. This means we are buying the base currency – the Euro, and simultaneously selling the quote currency – the US Dollar.
If we believe the Euro will weaken against the US Dollar, we will sell the pair i.e. we are selling Euro and simultaneously buying US Dollars.
Major Currency Pairs
Major currency pairs all contain the US Dollar on one side – either on the base side or quote side. They are the most frequently traded pairs in the FOREX market. The majors generally have the lowest spread and are the most liquid. The EUR/USD is the most traded pair with a daily trade volume of nearly 30% of the entire FX market.
Cross-Currency Pairs or Minor Currency Pairs
Currency pairs that do not contain the US Dollar are known as cross-currency pairs or simply “crosses”. Historically, if we wanted to convert a currency, we would have had to first convert the currency into US dollars and then into the currency which we desired.
With the introduction of currency crosses, we no longer have to do this wearisome calculation as all brokers now offer the direct exchange rates. The most active crosses are derived from the three major non-US dollar currencies (the Euro, the UK Pound and Yen). These currency pairs are also known as minors.
Exotic Currency Pairs
Exotic currency pairs are made up of a major currency pairs with the currency of an emerging or a strong but smaller economy from a global perspective such as Turkey or South Africa and European countries outside of the Eurozone.
These pairs are not traded as often as the majors or minors, so often the cost of trading these pairs can be higher than the majors or minors due to the lack of liquidity in these markets.
Please see the list of currency pairs in the table below:
|Major Currency Pairs||Cross-Currency Pairs||Exotic Currency Pairs|
|• EUR/USD||• EUR/GBP||• USD/TRY|
|• USD/JPY||• EUR/CHF||• EUR/TRY|
|• GBP/USD||• EUR/CAD||• USD/NOK|
|• USD/CAD||• EUR/AUD||• USD/DKK|
|• USD/CHF||• EUR/NZD||• USD/ZAR|
|• AUD/USD||• EUR/JPY||• USD/PLN|
|• NZD/USD||• GBP/JPY|