What is Forex?

What is Forex?

Forex Trading, essentially, is the buying of one currency while concurrently selling another one. In simple terms, the trader is dealing in currency pairs which are traded in unison, against each other.

For exemplary purposes only:

One of the most commonly traded currency pairs is the EUR/USD (Euro, United States Dollar). Most currencies (globally) are traded against the USD.

 

How Does Pair Trading Work?

To understand pair trading, it is important to first become orientated with basic trading terminology; Therefore, while dealing with pairs for such currencies, the first currency is called the base currency, while the second is known as the quote for the counter currency.

When the exchange rate is being monitored by the client, the client may see that the rate is indicated in terms of how much the counter currency is required to buy one unit of the base currency in question.

 

As of October the 15th 2016, the EUR/USD exchange rate has been reversed in this order:

1.09705 was the rate on the EUR/USD pair, which means that USD 1.09705 is needed to acquire a buy of EURO 1.00. In contrarian terms, this means that when selling, the same exchange rate is reversed when buying the opposite currency when you sell one unit of the other.

When trading Forex, the broker in question will list each currency pair along with the relevant exchange rate, while providing the client with the BID/ASK prices.

The ask price

Is the definition of the rate at which the broker wishes to sell, or the rate that the client is permitted to buy at for a currency pair.

The bid price

Is the amount which needs to be paid by the broker in question, as well as the amount that the broker is willing to pay, to buy the currency pair – or the amount that the trader will receive if they wish to sell the pair to the market; it is necessary to remember is that bid prices are always lower than ask prices, given that a broker is indefinitely want to pay less to buy, than what is expectant to gain when selling the same pair.

Spread

Is the difference between the BID/ASK prices;

The amount is usually very nominal, and this is where the revenue of a broker is derived from.

 

Major Currency Pairs

Currency pairs are categorized with regards to volume traded on each day, per pair. The ‘major pairs’ are the most commonly traded pairs, and usually trade versus the USD instrument. These include without limitation to the EU/USD, GBP/USD, USD/JPY. USD/CHF, AUD/USD, NZD/USD and USD/CAD pairs.

 

Minor and Exotic Forex Pairs

Pairs that don’t include the USD currency are known as the ‘Minor currencies’ or crosses. Such currency pairs tend to have marginally wider spreads, and are usually not as liquid as other pairs.

However, they do see adequately liquid markets, and can be substantially profitable to trade. In addition, one or both of the currencies in such pairs could be a major, such as the GBP/JPY pair or the EU/GBP pair.

Exotic pairs, on the other hand, are the pairs of currencies which are in the emerging markets; spreads tend to be wider, with the pairs being less liquid.

Below is an over view of some of the most frequently traded/mentioned minor pairs:

 

Currency Pair Country
USD/MXN United States / Mexico
USD/ZAR United States / South Africa
USD/SGD United States / Singapore
USD/HKD United States / Hong Kong
USD/DKK United States / Denmark
USD/SEK United States / Sweden
USD/NOK United States / Norway

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