What is Forex?
Welcome to the first lesson of our trading course.
In this chapter, we will look at the Forex market.
Forex, also known as the foreign exchange market, is the largest trading market in the world. The daily volume of transactions in currencies is estimated to exceed $5 trillion. Forex trading takes place twenty four hours a day, 5 days a week.
Put simply, Forex, also known as FX, foreign exchange or currency trading, is the exchange of one currency for another at an agreed price. It’s a decentralized global market where all the world’s currencies trade. This means the trades are fast and inexpensive. The market open times follow the sun around the earth, through the world’s most important financial centers..
Opening on Monday morning in Sydney, Australia, before progressing to the Asian markets in Tokyo, Singapore and Hong Kong. The European session is next, through the Frankfurt and London open, before moving to New York and the US session.
Currency values rise and fall against each other due to a number of economic, geopolitical and technical factors.
To put the enormous size of the Forex market into context, the daily volume of the New York stock exchange is around $110 billion. This enormous volume is what makes Forex so volatile compared to other markets. Volatility means that currency prices are constantly fluctuating in value against each other, creating many trading opportunities almost every single day of the year.
Forex trading is the act of speculating on the movement of exchange prices by buying one currency while simultaneously selling another. Currency values rise (appreciate) and fall (depreciate) against each other due to a number of economic, geopolitical and technical factors.
It is extremely likely you have participated in the Forex market in the past. Whenever you have converted currency into another for a holiday or business trip, you have engaged in a trade of currency.
The main professional participants in the FX market are central and commercial banks, financial institutions – such as hedge funds, retail traders and companies that engage in international trade.
The Fundamentals of Forex Trading
Forex prices fluctuate constantly. Currency traders seek to profit on these fluctuations by speculating whether prices will rise or fall. Using fundamental analysis, technical analysis or a combination of the two.
Currencies trade in “pairs”. For example GBPUSD – Pound Sterling and the US Dollar. The first quoted pair – pound sterling – is called the ‘base’ currency, and the American dollar is called the ‘counter’ – which is the second denoted currency.
Each currency could strengthen (appreciate) or weaken (depreciate) against the other. If you believe the value of a currency will rise, you “go long”; or ‘buy’ that currency. If you believe the value of a currency will fall against another, you “go short” or ‘sell’ that currency.
We will go into the full details of trading in future lessons.
Forex Majors
The most liquid and actively traded currency pairs are referred to by traders as the “Forex majors”.
Other currency pairs available to trade are “crosses” of major currencies, e.g. GBP/AUD – Pound Sterling/Australian Dollar. There are generally referred to as “Forex minors”, or minor Forex pairs.
The final class of Forex pairs includes less liquid currencies or those of smaller countries. Examples of these currencies include the South African Rand (ZAR), the Turkish Lira (TRY), Polish Złoty (PLN), Hong Kong Dollar (HKD) and the Mexican Peso (MXN). These currencies, when paired with others, are known as “exotics”.
Many of the Forex majors have a nickname, which may be confusing to new traders, so we will go through these now.
EUR/USD
The Euro/United States Dollar is the most liquid Forex pair, but somewhat paradoxically, it is also very stable, and as a consequence it doesn’t move a great deal on a daily basis.
Because of its high liquidity, EUR/USD tends to have the lowest spread of all Forex pairs.
Traders often call this pair by the nickname the “Euro”, which could be confusing if taken out of context.
GBP/USD
The Great British Pound (or Pound Sterling)/United States Dollar is also a very liquid pair, although it has a slightly higher spread and is more volatile that the EUR/USD.
GBP/USD is commonly called “Cable”. This is one of the best known nicknames used in Forex. The name is derived from the steel cable laid under the Atlantic Ocean in 1858 to link the UK and US, enabling telegraphic messages with currency prices to be transmitted between the London and New York exchanges.
USD/JPY
The United States Dollar/Japanese Yen is a liquid pair. It is often just called the “Yen” by traders.
USD/CHF
The United States Dollar/Swiss Franc is a liquid pair. It is often referred to by its nickname the “Swissy” by traders.
AUD/USD
The Australian Dollar/US Dollar pair is liquid and is commonly called the “Aussie”.
EUR/GBP or NZD/USD or USD/CAD
There is some debate as to whether the Euro/Pound Sterling, the New Zealand Dollar/US Dollar or the US Dollar/Canadian Dollar pair is the last Forex Major. Some traders even regard all three of them as Forex Majors.
In any case, all are liquid and have relatively low spreads.
EUR/GBP doesn’t really have a commonly used nickname, but NZD/USD is often referred to as the “Kiwi. The USD/CAD is often called the “Loonie”, because the Canadian One Dollar coin features a type of bird called the common loon.
Final Thoughts
We hope you enjoyed this lesson and look forward to seeing you for the next installment.