The forex market is active 24 hours a day, five days a week, with Sydney, Tokyo, London and New York serving as the major trade centres.
The forex market has received a lot of attention in recent years due to the popularity of online trading platforms. These platforms offer new and experienced traders direct access to forex currency pairs and other assets, enabling them to build wealth and trade the markets from the comfort of their own homes.
Currency pairs explained
Currency pairs are the major asset classes of the forex market. A currency pair is simply the value of one currency against another. This “value” is referred to as the exchange rate. For example, the EURUSD currency pair explains how many US dollars (USD) are needed to buy one euro (EUR). In this example, the euro is the base currency and the dollar is the quote currency. The same rules apply to other currency pairs; the first currency is always the base and the second currency is always the quote.
Although there is a large number of currency pairs available, the vast majority of transactions involve just four currency pairs. These currency pairs are called the Majors. Below is a list of the Majors that dominate the forex market:
- EURUSD (euro-to-US dollar)
- USDJPY (US dollar-to-Japanese yen)
- GBPUSD (British pound-to-US dollar)
- USDCHF (US dollar-to-Swiss franc)
Other notable currency pairs include the USDCAD (US dollar-to-Canadian dollar) and the AUDUSD (Australian dollar-to-US dollar). As all of these examples illustrate, the US dollar is the world’s most actively traded currency. According to the Bank for International Settlements, the US dollar is involved in 87 percent of all forex transactions.
Forex trading
Forex traders are individuals that are actively involved in the buying and selling of currency pairs with the aim to earn a profit. Successful forex traders usually have a solid understanding of technical analysis and fundamental analysis. Technical analysis is the use of data such as past prices, volume and trends to predict future price activity. Fundamental analysis, on the other hand, involves studying overall economic conditions, including industry performance and government policy, to better understand the market.
When buying currency pairs, forex traders assume either a long position or a short position. Going long, as it’s often referred to, simply means buying a particular currency pair (that is, buying the base currency and selling the quote currency). Going short, on the other hand, involves selling the base currency and buying the quote currency. Using the example of the EURUSD, going long means buying the euro and selling the dollar; short-selling involves selling the euro and buying the dollar.
Final considerations
Forex trading provides new and experienced investors with a very active and highly liquid market in which to build wealth. New traders will find abundant resources, trading strategies and online education to help them navigate the forex market.
Like other financial markets, forex trading has its fair share of volatility and requires the same level of discipline, knowledge and practice as other financial assets. The forex market’s deep liquidity allows investors to use considerable leverage when trading. Leverage enables investors to trade more capital using borrowed money, allowing them to capitalize on even the smallest fluctuations in the currency market. However, keep in mind that leverage works both ways – it can significantly increase your losses as well as your gains.
This brief introduction is meant to give readers a very basic understanding of the forex market. A lot more education is required to trade the markets successfully. Practicing with a forex trading demo allows those learning to experience real market conditions in a safer environment – it also gives a good appreciation of the 24 hour a day forex market.
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).