Forex trading or currency exchange refers to the trading of international currencies against one another in a global, decentralized financial market that operates 24 hours a day, with the exception of weekends.
Forex is the short form of the term Foreign Exchange, and it is also referred to as FX.
The business of trading currencies is not carried out in a physical āplaceā; exchange takes place using the over-the-counter (OTC) technique through a platform provided by forex brokers.
The electronic trading of currencies proliferated during the mid 1990s, and currently it is practiced in almost every corner of the globe.
Market size and liquidity
The foreign exchange market is reputed to be the biggest financial market in the globe. The market boasts of a daily turnover of approximately $4 trillion, which is about 53 times the size of the New York Stock Exchange. Thus, the forex market is absolutely huge and offers wonderful opportunities to investors.
The foreign exchange market has many participants. Some of them are individual retail investors, financial institutions, corporations, securities dealers, and governments.
It is of essence to note that anyone can take part in forex trading as long he or she has adequate capital and the necessary knowledge.
In forex trading, the United States dollar is the king! It is the most liquid currency, constituting about 85 per cent of all transactions. The euro comes in second at about 39 per cent, Japanese yen at about 19 per cent, and British pound at about 13 per cent.
It is important to remember that since every transaction entails two currencies, the volume percentages of all individual currencies totals 200 per cent and not 100 per cent.
The dominance of the United States dollar in currency exchange is attributed to many factors. Some of which are it being the reserve currency of the world, the United States being the biggest economy of the world, the political stability experienced in the United States, and the widespread use of the United States dollar in cross-border transactions in many places around the world.
Importance of the forex market
A major advantage of the forex market is that it determines the value of one currency relative to another, and this is what eventually influences international trade and investment through enabling the conversion of one currency into another.
For example, a United States company can order goods from Britain and pay in Pounds, although it is based in American and carries out its transactions using the United States dollars.
The trading of currencies also offers a medium for speculation that increases liquidity in the market which plays a central role in preventing wild price swings.
The prices of currencies in the forex market usually move very fast.
Therefore, you should study different forex trading strategies and forex trading systems before throwing your hard-earned cash in the business of trading currencies.
As you will learn from this blog, these strategies and systems are integral if you want to reap huge profits in forex trading.
To learn more on the advantages of trading forex, read this article: 10 Advantages of Trading Forex
Base currency and quote currency
The online trading of currencies involves the buying of one currency while simultaneously selling another. As such, currencies are quoted in pairs.
A currency pair is composed of the base currency and the quote currency or the counter currency. Ā The former is the first part of the quote while the latter is the second part.
For example, the quotation USD/JPY, USD is the base currency while JPY is the counter currency. In most forex trading quotations, the USD is the base currency. However, the main exclusions for this are the EUR, GBP, and AUD currencies.
The currency pair indicates the amount of the quote currency that is required to buy one unit of the base currency; for instance, if EUR/USD is trading at 1.35, then it implies that it requires 1.35 dollars to buy 1 euro.
Therefore, the counter currency is what indicates your profits or losses for every transaction you make while trading forex.
Generally, the exchange rate of a currency against other currencies is an indication of the economic performance of that country weighed against the economic performances of other countries.
Therefore, traders usually execute trades based on their perception of the current and future economic performance of the economy of the country.
For example, when you place an order to buy GBP, you are projecting that United Kingdomās economy is performing well and will even continue to flourish in the foreseeable future.
And, after you have exited your trade, you will hopefully be laughing all the way to the bank.
Currencies are traded in pairs
There are several forex currency pairs you can select for trading. You can choose major currency pairs, minor currency pairs, or exotic pairs. Major currency pairs contain the United States dollar and are the most liquid and popularly traded in the foreign exchange market.
They are seven in number as given in the table below:
| Symbol | Currency Pair | Nick Name |
| EUR/USD | Euro versus United States dollar | euro dollar |
| USD/JPY | United States dollar versus Japanese yen | euro yen |
| GBP/USD | British Pound versus United States dollar | pound dollar(cable) |
| USD/CHF | United States dollar versus Swiss franc | dollar swissy |
| USD/CAD | United States dollar versus Canadian dollar | dollar loonie |
| AUD/USD | Australian dollar versus United States dollar | aussie dollar |
| NZD/USD | New Zealand dollar versus United States dollar | kiwi dollar |
Minor currency pairs do not contain the United States dollar. They are also referred to as cross-currency pairs.
The popularly traded minor currency pairs consist of those derived from the three major non-United States dollar currencies, and these are EUR, JPY, and GBP.
The table below gives some examples of cross-currency pairs:
| Symbol | Currency Pair | Nick Name |
| EUR/CHF | Euro versus Swiss franc | euro swissy |
| EUR/GBP | Euro versus British Pound | euro pound |
| CAD/JPY | Canadian dollar versus Japanese yen | loonie yen |
| NZD/JPY | New Zealand dollar versus Japanese yen | kiwi yen |
| GBP/CAD | British pound versus Canadian dollar | pound loonie |
| GBP/NZD | British pound versus New Zealand dollar | pound kiwi |
Lastly, exotic pairs in the foreign exchange market are composed of a currency of a major economy paired with a currency of an emerging economy such as South Africa or Denmark.
These currency pairs are not as widely traded as the majors and the minors. As such, the transaction costs incurred when trading these pairs are normally higher.
The table below gives some examples of exotic currency pairs:
| Symbol | Currency Pair | Nick Name |
| USD/ZAR | United States dollar versus South African Rand | dollar rand |
| USD/DKK | United States dollar versus Dannish krone | dollar krone |
| USD/MXN | United States dollar versus Mexican peso | dollar peso |
Summary
Forex trading is increasingly becoming an investment of choice for most people across the world. However, to succeed in the online trading of currencies, one has to start by having a deep understanding of how the forex market operates.
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