What is Forex
Forex or Foreign exchange is the financial market where currencies of different countries are traded or exchanged. It is the world's largest financial market, with $6.6 trillion being traded on average every day. The market participants include individual traders, speculative traders, central banks, commercial banks, hedge funds, and other financial institutions.
The market participants
- Individual Traders
- Central Banks
- Commercial banks
- Hedge Funds
- Speculative Traders
- Financial Institutions
Forex trading involves purchasing and selling different currencies in the Foreign Market; for example, exchanging US Dollars for the Euro. There are many benefits of trading in Forex, like deep liquidity, greater leverage, low barriers to entry, and access to a 24-hour market.
How Forex Trading Works?
Forex trading involves two currencies, which is called 'currency pair.' Each currency is represented by a unique three-letter code like USD for US Dollar, EUR for Euro, JPY for Japanese Yen, GBP for United Kingdom Pound Sterling.
The Forex prices at which the currencies are exchanged are called rates. There are many reasons these rates change. The demand and supply have a major influence on the rates, along with economic trends and socio-political events.
So, for example, when we say the current rate of AUD/USD is 0.77960, it means 1 Australian Dollar can be purchased with 0.77960 US Dollar. In the pair, the currency on the left is called ‘base currency’ and the one on the right is called ‘quote currency’. So, in the given example, AUD is the base currency and USD is the quote currency.
You can partake in forex trading via a Forex broker. You can also leverage Forex price movements using derivatives like CFD. When you anticipate the value of any base currency in a pair to increase, you can open a buy position. Similarly, when you anticipate the value of any base currency in a pair to decrease, you can open a sell position.
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Which Currencies are Traded in Forex Market?
There are three types of currency pairs in the FX market: Major, Minor, and Exotic.
| Major The Major currency pairs make up of currencies that are frequently traded. | Minor The Minor currency pairs are those that don't have US Dollar. | Exotic The Exotic currency pairs involve one major currency and another currency of a developing |
|---|---|---|
| EUR/USD | EUR/GBP | JPY/NOK |
| GBP/USD | GBP/JPY | EUR/TRY |
| USD/CAD | EUR/AUD | GBP/ZAR |
| USD/JPY | NZD/JPY | AUD/MXN |
| AUD/USD | GBP/CAD | USD/HKD |
| USD/CHF | CHF/JPY | NZD/SGD |
| NZD/USD | etc... | etc... |
Which currency pair you should trade in depends entirely on your experience, skills, and portfolio requirement. However, if you’re new in Forex trading, you should ideally trade in Major currencies in the initial stages since they have deep liquidity and the lowest spread
Want to Learn More?
You now know what is Forex market, how to define Forex, what currencies are involved, and how Forex works. These are just the basics though. If you want to learn more about Forex, check out our trading guides here. We bring extensive resources about Forex and other financial markets to help investors and traders to become more educated and make better decisions.