Forex Trading Is The Practice Of Buying And Selling Currencies
Forex is short for Foreign Exchange, this is a market where traders can buy and sell the world’s currencies. Forex trading is done in two ways. The world’s physical delivery currencies are traded bank to bank or between the banks, whereas Forex CFD’s or currency pair CFD’s are traded via your broker.
A contract for difference (CFD) is a popular form of derivative trading. These types of transactions are not traded for physical delivery.
Currency pair CFD prices are derived from the physical delivery market and are quoted on a platform which is supplied by a broker. As a result, when trading a Currency pair CFD you are trading the price move of one currency against another currency.
For example the move between the Euro (EUR) against the Dollar (USD).
Each forex exchange trade involves two currencies, the base currency, and the quote currency. The stronger currency is always quoted first.
The quotation EUR/USD 1.2500 means that one euro is exchanged for 1.2500 US dollars. Here, EUR is the base currency, and USD is the quote currency or counter currency. This means that 1 Euro can be exchanged for 1.25 US Dollars.
Trading Forex Currency Pairs
In the physical delivery arena, this means that if you had 1 Euro you would receive 1.25 USD in return.
In the CFD arena, there is no physical delivery. We are trading the price of the base currency against the quote currency. If we believed the Euro would strengthen against the Dollar we would be purchasing the Euro against the Dollar, if we believed the Dollar would strengthen, we would sell the Euro.
There are many facets to forex trading such as the forex broker, trading platforms, PIPs, forex trading strategies, and developing a forex trading plan with stop-loss orders in place.
Forex Trading Market Daily Turnover
The Currency market has an approximate daily turnover of $5.3 trillion.
Let’s put that in context. The world’s largest exchange, NYSE, has a daily turnover of approximately $168 billion.
Trillions, Billions, what does it all mean?
To truly understand the size of the currency market, here is a simple comparison.
12 days has 1 million seconds
1 year has 1 billion seconds
But to get to 1 TRILLION seconds, you need to be count for just short of 32 years
The currency market is enormous. And because of the sheer size and volumes, it is impossible for one player or bank to manipulate the price of a currency pair. It is a safe market to operate in without fear of manipulation.
The Major Forex Currency Pairs
The most traded currency pairs in the world are called the Majors. Investopedia identifies the following currency pairs as the majors.
In general, the eight most traded currencies (in no specific order) are the U.S. dollar (USD), the Canadian dollar (CAD), the euro (EUR), the British pound (GBP), the Swiss franc (CHF), the New Zealand dollar (NZD), the Australian dollar (AUD) and the Japanese yen (JPY).
For more, you can watch this video tutorial that also explains what forex is.