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 24 hours a day, five 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 is a decentralized global market where all the world’s currencies trade. This means trades are fast and inexpensive. Market opening times follow the sun around the Earth through the world’s most important financial centres.

The trading week opens on Monday morning in Sydney, Australia, before progressing to the Asian markets in Tokyo, Singapore and Hong Kong. The European session follows, through the Frankfurt and London opens, 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 with other markets. Volatility means that currency prices are constantly fluctuating in value against each other, creating many trading opportunities almost every trading 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 that you have participated in the Forex market in the past. Whenever you have converted one currency into another for a holiday or business trip, you have engaged in a currency transaction.

The main professional participants in the FX market include 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 from these fluctuations by speculating on whether prices will rise or fall, using fundamental analysis, technical analysis or a combination of the two.

Currencies trade in pairs. For example, GBP/USD represents Pound Sterling and the US Dollar. The first quoted currency, Pound Sterling in this example, is called the base currency. The second, the US Dollar, is called the counter currency.

Each currency can 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 its value will fall against another currency, 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, such as GBP/AUD, Pound Sterling/Australian Dollar. These 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 include the South African Rand (ZAR), Turkish Lira (TRY), Polish Złoty (PLN), Hong Kong Dollar (HKD) and Mexican Peso (MXN). These currencies, when paired with others, are known as exotics.

Many of the Forex majors have nicknames, 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, does not 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 the Euro, which can be confusing if taken out of context.

GBP/USD

The Great British Pound, or Pound Sterling, against the United States Dollar is also a very liquid pair, although it has a slightly higher spread and is more volatile than 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 transatlantic cable laid in the 19th century to link the UK and US, enabling telegraphic messages containing currency prices to be transmitted between London and New York.

USD/JPY

The United States Dollar/Japanese Yen is a liquid pair. It is often simply called the Yen by traders.

USD/CHF

The United States Dollar/Swiss Franc is a liquid pair. Traders often refer to it by its nickname, the Swissy.

AUD/USD

The Australian Dollar/US Dollar pair is liquid and is commonly called the Aussie.

EUR/GBP, NZD/USD and USD/CAD

There is some debate as to whether Euro/Pound Sterling, New Zealand Dollar/US Dollar or US Dollar/Canadian Dollar should be considered the final Forex major. Some traders regard all three as Forex majors.

In any case, all are liquid and have relatively low spreads.

EUR/GBP does not have a commonly used nickname. NZD/USD is often referred to as the Kiwi, while USD/CAD is commonly called the Loonie, after the common loon depicted on the Canadian one-dollar coin.

We hope you enjoyed this lesson and look forward to seeing you in the next instalment.