Introduction to Forex
The word forex stands for foreign exchange. This introduction to forex contains all you need to familiarize yourself with the forex market. However, you will need to read more than this introduction to Forex to be able to take trades.
The foreign exchange (forex) market is a global market where one can buy and sell any of the currencies of all countries in the world. It is also referred to as the currency market.
You carry out foreign exchange anytime you trade your home currency for foreign currency or any currency for another. In addition, different entities trade forex for different reasons.
The forex market was opened during the 70s with the establishment of free
exchange rates. The exchange rate in forex is primarily governed by the law of supply and demand.
This introduction to forex contains information about the size, currencies, and players in the forex market.
Size of the Forex Market
The forex market is undisputedly the largest financial market in the world. And it has a daily trading volume in excess of USD4 trillion in 2010 as determined by the authoritative source on global forex market activity – the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, published by the Bank for International Settlements (BIS).
In 2016, a survey published by the BIS puts the daily trading volume at
about USD5.4 trillion. The forex market continues to grow.
Currencies in the Forex Market
Currency values are determined relative to one another. This is why in the
forex market the currencies are traded as pairs. Therefore, a currency pair consists of two currencies, the base currency which is written first, and the quote
currency.
The currency price or rate displayed for the pair indicates the amount of the
counter currency that is needed to purchase 1 unit of the base currency. In other words, the amount of the counter currency for which 1 unit of the base currency can be exchanged.
The eight most commonly traded currencies form the seven major currency pairs. These seven majors dominate the forex market in terms of traded volume. Since January 2012, it is estimated that the seven majors account for over 85% of the daily traded volume in the forex market.
These seven major currency pairs are:
- EUR/USD: euro versus U.S. dollar
- USD/JPY: U.S. dollar versus the Japanese yen
- GBP/USD: Great Britain pound versus U.S. dollar
- AUD/USD: Australian dollar versus U.S. dollar
- USD/CHF: U.S. dollar versus the Swiss franc
- USD/CAD: U.S. dollar versus the Canadian dollar
- NZD/USD: New Zealand dollar versus U.S. dollar
Other types of currency pairs are minor and exotic pairs.
Learn more about forex majors, forex minors, and forex exotics.
Forex crosses
A cross-currency pair is one that consists of a pair of currencies traded in forex that does not include the U.S. dollar.
Although it used to refer to currency pairs that did not include your home currency, with the globalization of the US dollar, the definition has changed.
Examples of forex crosses include both minor pairs and exotic pairs.
Forex Players
The players in the forex market are:
- Commercial banks
- Corporations
- Investment funds
- Central banks
- Governments
- Traders
To find out how these entities affect the forex market click here.
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