Forex trading, simply put, is the trading of currencies from different countries against each other. Traders buy or sell one currency for another with the view to making a profit when national, or international, occurrences cause favourable movements in the value of either of the currencies. When trading forex you do so in pairs and, as such, are simultaneously buying one currency and selling another. For example, should you choose to trade the Pound Sterling (GBP) against the US Dollar (USD) you would trade the following pair, GBP/USD. In this instant, you would be buying the GBP and selling the USD which is known as, ‘going long’ on the GBP/USD.
The forex market is a truly 24 hour trading exchange allowing traders to react to currency fluctuations day and night. There is no central market place for trading currencies, it is a trade primarily conducted electronically between traders all over the globe via computer networks through a broker or dealer.
This is the most liquid market in the world, meaning it has the most buyers and sellers of any tradable market with a reported daily trading volume of $3.2 trillion. Due to the trading volume on Forex markets traders will get better fills on their orders, that is, less slippage than you would typically get on markets with less liquidity. On top of this, traders will also find smaller spreads which means the price will not have to move as far for you to find yourself in a profitable position. The size of the spreads will vary between brokers as will whether the broker offers fixed or variable spreads.
Although historically currency has been traded by governments and institutions, technological advancements and the advent of the internet have made it an easily tradable financial instrument for individuals looking to profit from the exchange. Speculators seeking to profit from the forex market now account for 95% of the trading volume and tend to restrict trades to the more liquid, major currency pairs. Despite this, many minor and exotic pairs are available for trading but, due to their volatility and lower levels of liquidity, carry much higher margins and bigger spreads.
Tradable forex pairs come in the form of major, minor and exotic pairs.
• Major pairs are those that contain the USD.
• Minors, also known as ‘major crosses’, are generally considered to be those that do not contain the USD but contain one of the three major non-USD currencies – GBP (pound sterling), JPY (Japanese Yen) and the EUR (Euro). Other minors include the AUD (Australian Dollar), CHF (Swiss Franc), CAD (Canadian Dollar) and the NZD (New Zealand Dollar).
• Exotic pairs are those which pair the USD with the currency of an emerging economy such as the Mexican Peso (MXN) or the South African Rand (ZAR).
Exotic pairs will generally come with a greater spread size so remember to factor this into your trading plan. It is a good idea to start with the majors and minors and move on to the exotics once you are more experienced and know how to trade forex.
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