A term that often pops up on the internet and even more on business channels and conversations—Forex. You might have surely read a tad bit about it here and there, but do you really know what’s the Forex trade all about? Do you find yourself wondering about what is actually traded in forex? Well, you’re not alone.
Most of the people who’re not involved in the top-financial sector don’t have detailed information about this topic. The mere talks about complicated international trades might make many of us recall our Economics classes. However, Forex trade is not all that complex if we really wish to understand it better.
Putting it out in layman terms, trading or exchanging of currencies is forex. Is it that simple? To be honest, not really. Forex trade is slightly more challenging than the mere exchange of simple currencies. This is an essential part of a huge, global financial market that involves trillions of trades within a day.
Sounds scary? Don’t worry. This article has got you covered with the tiniest of details you may want regarding Forex trade. What exactly is traded in the foreign exchange (in short, Forex) market, and how is it done? You’ll know it all by the end of this read.
What Does Forex Trade Involve?
When buying and selling is not done in front of you, physically, it is bound to seem confusing. As this trade mostly takes place digitally, it can be daunting. The current rate of a currency reflects the economic health of its respective country.
Stating clearly, for earning a profit in currency trade, you need to consider the economic level of the respective countries. When you buy a currency for trading, you’re buying a piece of that country’s economy. You expect that this particular economy is likely to grow in the near future.
Firstly, what you need to understand is that you always buy one currency in terms of another currency. For example, if you buy 1 Euro, you will pay 1.0918 US dollars for the same. So, any forex trade clearly involves two currencies. This brings us to the conclusion that Forex trade is always done in pairs.
Currencies and Currency Pairs
If you want to know about forex trade, you need to have a detailed understanding of currency pairs. We already know that there are always two currencies involved in a forex trade. Furthermore, these two currencies can be termed as quote currency and base currency.
The former currency is the one used for reference, whereas the latter is quoted. Confusing? Let’s take an example.
If a currency pair EUR/USD is quoted as EUR/USD 1.1150, it means that one Euro is exchanged for 1.1150 US dollars. Here, the Euro is the base or transaction currency, and the US dollar is the quote or counter currency.
But how are these currencies chosen? How is a currency pair formed? For a transaction to be completed in the forex market, the simultaneous purchase and sale of two currencies are required. These two currencies together form the Currency Pair. Easy? Yes, up till now.
A currency pair can involve any two currencies of the world. Even if there are two countries at the opposite ends of the globe, their currencies can form a pair. For a currency pair to be formed, the only required condition is their exchange trade. Getting a hold of it? Let’s go ahead!
Wondering what the most traded currencies are? Here’s a table showcasing 20 most traded currencies as of 2019, according to their value.
Top-Most Traded Currencies in 2019
(Source: “Triennial Central Bank Survey Forex Turnover”)
| Rank | Currency | ISO 4217 code (symbol) |
% of daily trades (bought or sold) (April 2019) |
| 1 | United States dollar | USD (US$) | 88.3% |
| 2 | Euro | EUR (€) | 32.3% |
| 3 | Japanese yen | JPY (¥) | 16.8% |
| 4 | Pound sterling | GBP (£) | 12.8% |
| 5 | Australian dollar | AUD (A$) | 6.8% |
| 6 | Canadian dollar | CAD (C$) | 5.0% |
| 7 | Swiss franc | CHF (CHF) | 5.0% |
| 8 | Renminbi | CNY (元) | 4.3% |
| 9 | Hong Kong dollar | HKD (HK$) | 3.5% |
| 10 | New Zealand dollar | NZD (NZ$) | 2.1% |
| 11 | Swedish krona | SEK (KR) | 2.0% |
| 12 | South Korean won | KRW (₩) | 2.0% |
| 13 | Singapore dollar | SGD (S$) | 1.8% |
| 14 | Norwegian krone | NOK (KR) | 1.8% |
| 15 | Mexican peso | MXN ($) | 1.7% |
| 16 | Indian rupee | INR (₹) | 1.7% |
| 17 | Russian ruble | RUB (₽) | 1.1% |
| 18 | South African rand | ZAR (R) | 1.1% |
| 19 | Turkish lira | TRY (₺) | 1.1% |
| 20 | Brazilian real | BRL (R$) | 1.1% |
Furthermore, depending upon its exchange frequency, every currency pair falls under a different category. The higher the value of a currency, the more it is traded. Moreover, greater trading of a currency pair places it in a higher category. You can choose a currency pair from any of the three categories of currency pairs.
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Major Currency Pairs
Occupying over 80% of the foreign exchange market, this category tops the list. You should know that these pairs are the most commonly traded and involve USD as one of their currencies. Major currency pairs are highly liquid, and the best options for your trades. Trading in these pairs will certainly increase your chances of gaining profits as they belong to relatively stable economies.
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Cross/Minor Currency Pairs
Bringing you in easy language, cross currency pairs are those that do not involve USD. These currency pairs may be good for you but only after detailed research about their respective economic positions.
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Exotic Currency Pairs
Currency pairs of this category are formed by pairing currencies from emerging economies with major economies. If you are looking for forex trading, this category holds the maximum risk. You will find these currencies to be less liquid and quite prone to manipulation and changes.
Category Wise Examples of Currency Pairs
| MAJOR CURRENCY PAIRS | CROSS CURRENCY PAIRS | EXOTIC CURRENCY PAIR |
| EUR/USD | GBP/JPY | EUR/TRY |
| USD/CAD | CAD/CHF | CHF/NOK |
| AUD/USD | AUD/JPY | USD/MXN |
| USD/JPY | EUR/GBP | USD/ZAR |
Abbreviations: Euro (EUR), US Dollar (USD), Canadian Dollar (CAD), Australian Dollar (AUD), Japanese Yen (JPY), Great Britain Pound (GBP), Swiss Franc (CHF), Turkish Lira (TRY), Norwegian Krone (NOK), Mexican Peso (MXN), South African Rand (ZAR)
Forex trading is an international business where currencies are traded 24 hours a day, for five days a week. With a daily turnover of approximately 5 trillion USD, forex is downright the world’s largest financial market. Mind-boggling, isn’t it?
Let’s take an example from your life routine. When you go to visit a foreign country, you will obviously need to buy the currency of that particular country. Let’s say you travel to Japan and buy Japanese Yen worth 1000USD. After 3 days, you return home but without actually spending any yen. So, you exchange the yen back to dollars, but, to your amazement, you get 1010USD!
Wondering why you would get extra dollars? Here’s where the exchange rate comes in. You receive a greater amount of dollars because of the increased USD rate. During the three days of your visit, the value of USD increased, causing a change in the exchange rate. Viola! You earned a profit of 10USD by trading currencies.
Forex Trading Terms
Although you can conduct a forex trade over the internet, this trading business is considerably challenging. Let’s get familiar with some forex terms that may be new to you. We’re already aware of base and quote currencies, but not their trade procedure.
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PIP
The short form for Percentage In Point, PIP is a term that denotes the change in a currency pair. Keeping a close look at price movements is quite essential for forex trading. Even a few pips can be qual to large profits or great losses. As the forex trade business usually involves trade worth millions, every risk must be weighed while trading.
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Long Position
Consider buying a currency with an expectation that its value is soon to increase. You want to sell this currency at a higher price to gain profit. In such a situation, you will be in along position. Once you sell the currency at a higher rate, your trade is complete, and the long position will be closed.
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Short Position
Inversely, if you sell a currency with the intention of buying it back at a lower price, you’re in a short position. But why would you do so? For example, you sell your 5 EUR for 5.682 USD and expect the EUR value to decrease. After a couple of days, when the EUR value decreases, you buy 5 EUR for 5.002 USD. You will earn a profit of 0.680 USD.
Other Trades in the Forex Market
I’m sure you have understood forex trade to a great extent by now. However, currency pairs are not the only trades made in the foreign exchange market. Let’s have a look at what other trade opportunities lie here.
- Indices
- Cryptocurrencies
- Precious metals
- Commodities
- Stock Trading Opportunities
Forex trading can offer extensively high amounts of profits as well as immoderate losses. Although you can close a trade with a few clicks on your laptop, it requires careful research and thinking. You certainly need to have a complete understanding of the forex trade before you plan to invest in it.
However, having weighed all the risks you may have to incur, you can surely step into this over-the-counter (OTC) market. After all, irrespective of the consequences, this is undoubtedly a great investment platform.
What are you waiting for? Dig into some research about currency rates and start the real forex trade today at XTB or IC Markets!
