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Forex or FX refers to the biggest and most liquid financial market in the world and is short for foreign exchange. This global market allows traders from around the world to trade currencies or CFDs on forex through financial institutions such as a broker. With an average daily trading volume of $7.5 trillion, forex is the biggest and most liquid financial market in the world.
People and businesses are converting currencies daily. For instance, you might exchange your travel money when going on a vacation abroad. A company might also exchange currencies to pay for goods bought or sold overseas.
A forex pair includes 2 currencies which are described as base currency and quote currency. The base currency is the one listed on the left of a currency pair. The quote currency is the one listed on the right. In the EUR/USD for example, the euro is base currency, and the quote currency is the US dollar.
What is the process for trading forex?
When you trade currencies, you are buying and selling a currency simultaneously. Again, using the example of the EUR/USD, you can see that the pair is quoted as follows: 1 Euro equals 1.13 US dollars. This is the current rate of the EUR/USD which fluctuates based on the incoming data as well as demand and supply.
ISO (International Organisation for Standardisation) codes are used to name currencies in foreign exchange in a way that is more efficient and shorter when trading. When indicating a pair of currencies, these three-letter codes are utilised. This makes it easy for traders to recognise the letters that make up what they refer to as a currency pair.
When a trader purchases a pair of currencies, they anticipate that the price will increase and that the base currency will be strengthening in relation to the quote currency. It is anticipated that the price will drop if a trader sells a currency pair, which would occur if the base currency depreciated versus the quote currency.
Major currency pairs in forex
One of the main differences between the forex and equity markets is the number of instruments available for trading. The forex market offers a far smaller selection. In contrast, the equity market provides access to thousands of company stocks.
Forex traders can typically choose from around 180 different currency pairs. However, most market participants focus on trading just seven of these pairs. These are known as the “majors”: EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, AUD/USD, and NZD/USD.
Beginner forex traders tend to be advised to start by trading “major” forex pairs. These pairs provide the greatest market liquidity, which is the primary explanation. It’s crucial to have liquidity. It indicates that the pair is being traded by a large number of investors. You will benefit from this since it will make buying and selling simpler. It also implies that the price differences between what you can sell and what you can buy will typically be less pronounced.
Greater price differences between more “minor” forex currency pairs can result in higher market volatility right away. When there are less active buyers and sellers then there tends to be higher volatility.
EUR/USD (Euro/US dollar)
Nickname: Fiber
The Euro-Dollar, or EUR/USD, is a combination of the currencies of the United States and the Eurozone.
Interest rates are one of the main factors separating the value of the US dollar and the euro. The differential policies between the Federal Reserve and the European Central Bank (ECB) can influence the pair. For example, when the ECB was lagging behind the Fed in taking a more active step in increasing rates, this tended to weigh on the euro. In the meantime, any problems impacting EU countries have the potential to destabilise and devalue the EUR/USD.
US dollar/Japanese yen, or USD/JPY
Nickname: Gopher
Another significant currency pair in the forex market is the USD/JPY, or “Dollar-Yen.” It calculates the number of Japanese yen needed to buy one US dollar.
This forex pair is popular for a key reason. It uses the most traded currency as its base currency. It also uses the primary reserve currency in terms of liquidity as its quote currency.
GBP/USD (US dollar/pound)
Nickname: Cable
The British pound sterling and the US dollar are combined in the GBP/USD currency pair, which was formerly known as the “Cable.” The UK’s Brexit vote to leave the European Union has been a major influence on the GBP/USD exchange rate in recent years.
After the referendum, the price of GBP/USD fell sharply due to extreme uncertainty over the UK-EU trading relationship.
Since then, the exchange rate has stabilised.
USD/CHF (Swiss franc/US dollar)
Nickname: Swissie
“Swissie” is the official currency of Switzerland and Liechtenstein. “Swiss” here refers to the Swiss National Bank which issues the currency. The Swiss Franc is a safe haven currency, just like the yen and the US dollar and is preferred by investors and traders during times of economic uncertainty.
The Australian dollar to the US dollar, or AUD/USD, is a popular forex currency pair
Nickname: Aussie
One of the most traded currency pairs in the world is AUD/USD. The production of Australian commodities, including coal, iron ore, and copper, can have a significant impact on trading the AUD/USD, also referred to as the “Aussie.” Since global commodity prices typically rise in response to robust economic growth.
The AUD/USD exchange rate is highly cyclical and volatile due to its close relationship to commodity prices and is described as a “risk-on” currency pair. Because China is one of the main consumers of commodities, the AUD/USD exchange rate is also strongly correlated with the state of the Chinese economy.
New Zealand dollar/US dollar, or NZD/USD
Nickname: Kiwi
The New Zealand dollar and the US dollar are the two currencies in this pair. Because the $1 coin features the Kiwi bird, it is frequently referred to as trading the “Kiwi.” Due to the Kiwi’s significant appreciation, the Reserve Bank of New Zealand stepped in to devalue it in 2012. It ranks as the world’s tenth most traded currency.
US dollar/Canadian dollar, or USD/CAD
Nickname: Loonie
The currency pair of the US dollar and the Canadian dollar is abbreviated as USD/CAD. The quoted exchange rate between these two currencies is one US dollar (the base currency) for every X Canadian dollars (the quoted currency). Therefore, you would pay 1.26 Canadian dollars for every US dollar if a bank or exchange desk quoted USD/CAD at 1.26 while you were travelling. The US dollar has historically been the stronger of the two currencies, even though they have occasionally reached parity.
Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.
JA 
