What is Forex Trading?

‘Forex’ or ‘FX’ derives from ‘Foreign Exchange’. It is a decentralized global market where traders are able to buy and sell currencies. It is the largest and most liquid market in the world, with an average daily trading volume worth over $5 trillion.

When a person travels from one country to another, it is usually required to convert money to the currency that is used in the country that they are travelling to. For example, when a resident of the United States travels to Italy, he/she is required to exchange their US dollars to the Euro currency.

In the same way, an international firm is sometimes required to exchange currencies in order to pay employees that are located overseas. The exchange rate fluctuates continuously as it is based on supply and demand. Therefore, this determines how much of currency A will be required in order to obtain currency B. Depending on the price, it is sometimes advisable to wait for a more favorable rate as it can make a big difference when a large amount of exchange is concerned.

In Forex, currency pairs can be traded without physically owning currencies. In addition, a profit or a loss can be made from both upward and downward market trends.

Major currency pairs contain the US Dollar, generally have the lowest spreads and are the most liquid instruments. Cross currency pairs are traded against each other excluding the US dollar (ex: CADJPY, EURAUD…).

Below are some examples of what we call major currencies:

EUR/USD          Euro Zone/United States

USD/JPY            United States/Japan

GBP/USD          United Kingdom/United States

USD/CAD         United States/Canada

USD/CHF          United States/Switzerland

AUD/USD         Australia/United States

NZD/USD         New Zealand/United States

In Forex, certain currency pairs have their own terminology:
Symbol Currency pair Terminology
GBPUSD British Pound & US Dollar Cable
EURUSD Euro & US Dollar Euro
USDJPY US Dollar & Japanese Yen Dollar Yen
USDCHF US Dollar & Swiss Franc Dollar Swiss or Swissy
USDCAD US Dollar & Canadian Dollar Dollar CAD or Loonie
NZDUSD New Zealand Dollar & US Dollar Kiwi
AUDUSD Australian Dollar & US Dollar Aussie Dollar
EURGBP Euro & British Pound Euro Sterling
EURJPY Euro & Japanese Yen Euro Yen

When trading Forex (for example the EURUSD), the first currency EUR is called the ‘base currency’, which represents the direction and the second currency is called ‘counter or quote currency’ which indicates the profit or loss.