The forex market is the largest financial market in the world. On average, between $4 and $5 trillion is traded there daily. As a liquid financial market, forex exchange (FX) presents significant profit and loss prospects in equal measure.
Lots of success stories in forex lure people to start trading. Whilst some traders make it look simple, trading is a skill that requires knowledge to stand a chance of succeeding. In that regard, beginners who want to learn how to trade forex need to understand the fundamentals of the FX market.
How does it work?
It is a financial market where traders exchange currencies. The best analogy to explain the FX market is that of a traveler moving to a different country and exchanging their currency. So, instead of doing it physically, the FX market allows traders from all over the world to exchange money virtually.
It is all about speculation. A trader’s work is to predict the rise and fall of prices. If you get it right, you will gain profits, but you might lose if your predictions are wrong.
Trading is done online via exchanges. These are online brokers that buy and sell currency pairs on behalf of traders. Finding the best forex broker is the first important task for any new trader. This simple due diligence action helps in averting unforeseen risks.
Trading forex involves currency pairs. In other words, you buy or sell money. You will gain profits if your buy or sell trade is profitable. All transactions involve simultaneous buying and selling of currencies. The two currencies make a pair, which has a base and a quote currency.
The base currency is the first that appears in the FX pair. It is always worth one and is sold or bought in exchange for the quoted pair. For example, in EUR/USD, the Euro is the base and the US Dollar is the quote bill.
Major currency pairs
There are hundreds of currencies in the world but not all are traded in the forex market. A majority of the daily trading volume is confined to a few currency pairs. There are 8 major currencies today: USD, EUR, JPY, GBP, CHF, CAD, AUD, NZD.
Major currency pairs are formed when any of the main bills are paired with the USD. Here is a list of the major pairs:
- EUR/USD – This pair sets the Euro against the US D
- USD/JPY – This pair sets the US Dollar against the Japanese Yen.
- GBP/USD – It sets the British Pound Sterling against the US Do
- USD/CHF – It sets the US Dollar against the Swiss F
- AUD/USD – It sets the Australian Dollar against the US
- USD/CAD – It sets the US Dollar against the Canadian
- NZD/USD – It sets the New Zealand Dollar against the US Dollar.
Traders need to understand the main currency pairs and the factors affecting exchange rates in the world. This information makes trading more calculated, rather than a blind entry into the forex market.