What is Forex?
The foreign exchange market – also known as forex or the FX market – is the world’s most traded market, with turnover of $5.1 trillion per day.*
Forex is traded 24 hours a day, 5 days a week across by banks, institutions and individual traders worldwide. Unlike other financial markets, there is no centralized marketplace for forex, currencies trade over the counter in whatever market is open at that time.
Foreign Exchange trading, also known as Forex or FX trading, has gained enormous popularity in recent years among layman individuals due to the growth of online brokers and the technological development of online trading platforms. With high liquidity, non-stop opening hours 5 days a week, and great opportunities, it is no wonder that the forex market is the world’s most traded market with a daily trading volume of $5 trillion USD.
Why trade Forex?
Forex is the world’s largest market, trading around $5 trillion every day. This exceptional liquidity ensures reliable pricing even at high volumes and enables the tightest possible dealing spreads. When you trade forex your trading costs are comparatively low, and you can easily go long or short of any currency.In effect you are always going long of one currency and short of another, as you are exchanging the value of one currency for the other. This gives you the ability to make a profit from either the relative strength or the weakness of any given currency.As forex is traded on exchanges across the globe, from Tokyo to London to New York, we can take a position 24 hours a day throughout the trading week. Currency values are extremely sensitive to macroeconomic forces, so there are always trading opportunities.
Most Popular Forex Pairs
Some currency pairs are more liquid than others, which in theory makes them easier to trade. Below you will find information on the most popular currency pairs with the highest trading volumes. There is also plenty of information available online on each of them, should you wish to do further research.
A currency pair that does not involve the USD is known as a ‘Cross rate’ (or Cross). Popular Crosses include the EUR/JPY (Euro to Japanese Yen), GBP/JPY (Pound to Japanese Yen), and EUR/GBP (Euro to Pound).
There is a total of 8 major currency pairs; all of them involve the US Dollar. If the US dollar is not one of the currencies in the pair, it is not considered a major currency pair.
Forex Trading FAQ
There are many different factors that can affect the forex market. Below you can find a few:
- Central banks – The world’s money supply is determined by central banks. If a central bank increases the money supply, the currency will likely drop. Generally, central banks also control interest rate levels, which is critical to the strength or weakness of a currency.
- Economic data – Reports on the state of the economy serve as an important indicator of the currency’s strength. Major economic data includes unemployment rates, inflation rates and trade balances.
- Interest rates – Volatile currency moves tend to occur when a country’s central bank makes an unexpected move in interest rates. For example, if a central bank decides to unexpectedly cut interest rates the currency, this will normally lead to a significant drop in value (as the market responds to the sudden change in monetary policy).
Of course, this is not as straightforward in practice. You need to integrate a variety of indicators and take the quote currency into account as well. Plus, timing is extremely important. You can use charting tools and an economic calendar for indications of when to open or close a trade.
The bulk of FX trading is priced against the USD, which has long been regarded as the world’s official base currency. As mentioned above, all Major Currency Pairs (or Majors) are traded against the USD, and are generally regarded as the most popular currency pairs to trade. Many Cross-Currency Pairs (or Crosses) also experience heavy trading flows including EUR/CHF, EUR/GBP, and AUD/JPY – to mention a few.
In general, the top traded currency pairs are:
- EUR/USD – This is the most widely-traded pair with the highest volume and deepest liquidity.
- GBP/USD – This is a popular currency pair that tends to be more volatile than EUR/USD. Volatility in GBP/USD has been higher in recent times due to the effects of “Brexit” (Britain’s exit from the EU) and the economic uncertainty this has created.
- USD/JPY – This is the second most traded currency pair by volume behind the EUR/USD. It experiences high volume due to the size of Japan’s economy and its role in global economic trade. Due to its geographical location, trade in JPY can also reflect economic and geopolitical conditions in the wider Asian region.
The seven major pairs make up over 80% of the total FX trading. Crosses are currency pairs that do not involve the USD, such as EUR/GBP, AUD/NZD and EUR/CHF. Exotics are major currencies paired against a smaller, less liquid economy, such as EUR/TRY (Euro to Turkish Lira) or USD/MXN (US Dollar to Mexican Peso).
When choosing a currency pair to trade, you should test your strategy either with a popular FX pair, or with your local currency against the USD, on our free, unlimited Demo Account. Be cautious and diligent in your trades, and open small trades initially to carefully observe how the market is performing over time.
FXVIP offers CFD trading on the world’s leading currency pairs. Our user friendly yet advanced online CFD platform includes a free demo account, a wide variety of educational resources and trading tools that are made available to new and experienced traders alike. Our spreads are among the lowest in the industry and the intuitive platform is designed for ease of use, without compromising on in-depth analytical insights and sophisticated trading options.
Forex trading (also commonly known as Foreign Exchange, currency or FX trading) is a global market for trading one country’s currency in exchange for another country’s currency. It serves as the backbone of international trade and investment: imports and exports of goods and services; financial transactions by governments, economic institutions or individuals; global tourism and travel – all these require the use of capital in the form of swapping one currency for a certain amount of another currency.