Foreign exchange is the trading of currencies on the forex markets around the world. Most people may be familiar with the other financial markets in the world: The stock market, the bond market maybe even The Commodities Market, but fewer people actually know that these markets are dwarfed by the forex market. Yes, that’s actually the case. The forex market is 50 times bigger than the stock market and 15 times larger than the bonds market, but if the forex market is so large, why haven’t you as an investor been told about it? There are a few reasons for this. First of all, the forex market was not easy to trade on just a decade or two ago. Unlike the other financial markets there is no centralised exchange like the stock exchange. Instead, the forex market is purely an electronic market and exists only when someone makes a trade, but that is all the time. This market is called the Interbank market, because it is the internal market for banks all over the world. This means that if you want to trade forex, you must have access to the interbank market. Brokers are companies who have access to the Interbank market and with the growth of the internet, more and more brokers have moved their business online. Today, there are more than 100 hundred brokers available for online trading.
This has opened up the opportunity for individual traders to make money from trading forex online trough an online platform offered by their broker. A platform gives you access to trade any of the hundreds of currencies around the world. Traders make money by speculating in price changes of currency pairs. A forex pair is simply two currencies that you simoultaneously sell and buy. You always sell and buy currencies in pairs, because currencies are always valued against another currency, which makes sense if you think about it. So as a trader you can make money by both selling and buying currency and you can make money on price rises and price drops. This means you can make money no matter the market circumstances.
As mentioned there are more currencies available for trading than you can get your head around, but that doesn’t mean you should trade all of them. Most traders choose one or two pairs that they focus their attention on, because they will then better be able to know everything about what moves those currencies. Of course you can easily trade more currencies, but you should probably start out by only trading one. There are some pairs that are traded more than others, significantly more actually. These are called the Forex Major Currency Pairs and most forex traders trade these. Those that don’t usually trade what is known as ‘exotic forex pairs’. Let’s have a look at the Forex Major Pairs:
- US Dollar/Japanese Yen (USD/JPY)
- Euro/US Dollar (EUR/USD)
- US Dollar/Swiss franc (USD/CHF)
- British Pound/US Dollar (GBP/USD)
You can see that the USD is a part of all these pairs, which is because of it’s status as reserve currency. Each major forex pair responds to different events and requires a unique approach and strategy.