Introduction to Forex
The foreign exchange market (also referred to as forex or FX for short) is the world’s most liquid financial market. With a daily turnover of $5.3 trillion, the forex market brings together a multitude of participants – traders, governments, corporations, banks and investment funds – who trade currencies on the open market in order to facilitate trade and capitalize on price fluctuations.
The forex market is active 24 hours day, six days a week, with major trade hubs located in Sydney, Tokyo, London and New York.
Currency pairs are the main securities that are transacted in the forex market. A currency pair is the relative value of one national or regional currency against another national or regional currency. For example, the GBPUSD currency pair determines the value of one British pound (GBP) against one US dollar (USD). The rate at which a currency pair is traded is referred to as an exchange rate. In the above example, the GBPUSD currency pair tells the trader how many US dollars one British pound buys.
The first currency in a currency pair is called the base currency (sometimes referred to as the primary currency) and the second currency is called the quote currency. In the above example, the British pound is the base currency and the US dollar is the quote currency.
The Major Currency Pairs
There are many currency pairs transacted each day in the global forex market. However, the vast majority of transactions – some 87 percent according to the Bank for International Settlements (BIS) – involve the US dollars. This means that the US dollar is the most likely currency to be bought and sold in the forex market.
The most actively traded currency pairs are referred to as the majors. These currencies include the aforementioned US dollar (USD), British pound (GBP), Eurozone euro (EUR), Japanese yen (JPY) and Swiss franc (CHF). Below is a breakdown the most commonly traded currency pairs in the forex market:
- EURUSD (euro vs. the US dollar)
- USDJPY (US dollar vs. the Japanese yen)
- GBPUSD (British pound vs. the US dollar)
- USDCHF (US dollar vs. the Swiss franc)
In addition to those, other commonly traded currency pairs include the Canadian dollar (CAD), Australian dollar (AUD) and New Zealand dollar (NZD).
Other types of currency pairs, referred to as emerging market currency pairs, contain at least one currency from an emerging market such as Korea or Turkey. The currencies of these emerging markets are usually traded against the US dollar, euro or Japanese yen.
In this brief introduction we introduced readers to the global forex market and the major securities that are transacted in that market. In Part 2 we will explore how currency pairs are actually traded as well as the various methods traders use to determine the future price of specific currency pair.