Forex is the world’s most active market by trading volume and the largest market by value.
Given its global reach, Forex trading occurs 24 hours a day (excluding weekends) and sets the exchange rates for all the world’s currencies.
While assets such as stocks and commodities are traded on regulated exchanges, currencies are bought and sold over the counter (OTC). This means that currency trades are mostly conducted between institutional counterparties in major Forex trading centres around the world. This is called the interbank market.
The largest and most liquid FX trading centres are London and New York. Tokyo, Hong Kong, Frankfurt and Singapore are also important currency trading centres.
How does Forex trading work? Forex investors trade major and minor (not including the US dollar) currency pairs, assessing when one currency may appreciate against another.
Forex trading involves buying one currency with another (while selling another). Traders expect to make a potential profit by selling the currency at a higher price than when they originally bought it. A currency pair consists of a base currency and a quote currency. The exchange rate shows how much of the quote currency is needed to buy one unit of the base currency.
Each currency has a three-letter code: the first two often refer to the country, and the third to the currency itself. For example, the US dollar is USD, the Canadian dollar is CAD, and the Norwegian krone is NOK. There are exceptions, such as EUR (euro) and MXN (Mexican peso).
The most commonly traded currency pairs include the euro against the US dollar (EUR/USD), the US dollar against the Japanese yen (USD/JPY), and the British pound against the US dollar (GBP/USD).
Forex traders buy and sell currencies when they expect their value to fluctuate. For example, if a trader believes the euro will rise against the dollar – perhaps due to strong economic data in the eurozone – they might go long the EUR/USD currency pair. If they expect the euro to fall in value, they might go short the pair.
There are four main types of currency pairs that traders trade depending on their strategy:
Major pairs: the most actively traded pairs with greater liquidity and lower volatility. There are seven in total, and each one crosses the US dollar: GBP/USD, EUR/USD, USD/JPY, USD/CHF, USD/CAD, NZD/USD, and AUD/USD. These currency pairs account for 88% of all forex trading.
Minor pairs (cross currency pairs): currency pairs that do not include the US dollar. They are generally less liquid, so they can be more volatile. This means that CFDs on them can result in both greater profits and losses. Examples of minor currency pairs: EUR/GBP, EUR/AUD, GBP/JPY, NZD/JPY, GBP/CAD.
Exotic pairs: These usually include currencies from emerging markets. Low liquidity and high volatility can lead to rapid and unpredictable price movements. Examples of such currency pairs: EUR/TRY, USD/HKD, NZD/SGD, GBP/ZAR, AUD/MXN.
Regional pairs: currency pairs from specific regions, such as Scandinavia or Australia and Oceania. Examples: NOK/SEK, AUD/NZD, CNH/HKD.
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