Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where the entire world’s currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. All the world’s combined stock markets don’t even come close to this. But what does that mean to you? Take a closer look at forex trading and you may find some exciting trading opportunities unavailable with other investments.
FOREX TRANSACTION: IT’S ALL IN THE EXCHANGE
If you’ve ever travelled overseas, you’ve made a forex transaction. Take a trip to France and you convert your pounds into euros. When you do this, the forex exchange rate between the two currencies—based on supply and demand—determine how many euros you get for your pounds. And the exchange rate fluctuates continuously.
A single pound on Monday could get you 1.19 euros. On Tuesday, 1.20 euros. This tiny change may not seem like a big deal. But think of it on a bigger scale. A large international company may need to pay overseas employees. Imagine what that could do to the bottom line if, like in the example above, simply exchanging one currency for another cost you more depending on when you do it? These few pennies add up quickly. In both cases, you—as a traveller or a business owner—may want to hold your money until the forex exchange rate is more favourable.
ABOUT CURRENCY PAIRS
Forex is quoted in terms of one currency versus another. Each pair has a base and counter currency, and it is the trader’s job to determine how the base will perform against its counterpart.
If the price of a currency pair falls, it acts as an indicator that the counter currency is appreciating, while the base currency is depreciating. Traders will buy a currency pair if they believe that the base currency will appreciate against the counter currency and sell if they think the opposite is going to happen.
HOW ARE CURRENCY PAIRS DISPLAYED?
In currency pairs, the base currency is always displayed on the left and the counter is on the right. For example, if the US Dollar was the base and the Great British Pound was the counter, the pair would look like this: USD/GBP.
WHAT AFFECTS FOREX PRICES?
All currencies are divided into two categories – major and minor. The major currencies come from the strongest global economies – USA, Japan, UK, Canada, Australia, Switzerland, New Zealand and the Euro Zone.
There are many factors that cause fluctuations between currencies, such as economic and political uncertainty, natural disasters and social unrest. Some recent examples include the global economic crisis and the “Brexit” referendum in the UK.
Announcements from major financial institutions or economic groups also have an effect on the price of currency.