What is Forex?
Foreign exchange, or forex, is the world’s largest financial market; it is a market with a huge average daily trading volume of $5 trillion. AS-PRO PTY LTD offers 24-hour CFD trading on FX pairs, opening at 08:00 Sydney time on Monday mornings, and running through to 16:00 New York time on Friday afternoon. In basic terms, forex refers to the purchase of one currency against another. AS-PRO PTY LTD offers CFD trading on over 70* different currency pairs.
In the world of forex, there are 3 primary markets:
Spot Forex Market – The physical exchange of a currency pair, taking place on the spot date (generally, this refers to the day of the trade plus 2 days – “T+2”).
Forward Forex Market – An Over the Counter (OTC) contract to Buy or Sell a set amount of a currency at a certain price at a future date.
Forex Futures Market – A forex futures contract is an exchange-traded contract to Buy or Sell a specified amount of a given currency at a predetermined price on a set date in the future.
What Moves the Forex Market?
There are many different factors that can affect the forex market. Below you can find a few:
Central banks – The world’s money supply is determined by central banks. If a central bank increases the money supply, the currency will likely drop. Generally, central banks also control interest rate levels, which is critical to the strength or weakness of a currency.
Economic data – Reports on the state of the economy serve as an important indicator of the currency’s strength. Major economic data includes unemployment rates, inflation rates and trade balances.
Interest rates – Volatile currency moves tend to occur when a country’s central bank makes an unexpected move in interest rates. For example, if a central bank decides to unexpectedly cut interest rates the currency, this will normally lead to a significant drop in value (as the market responds to the sudden change in monetary policy).
Of course, this is not as straightforward in practice. You need to integrate a variety of indicators and take the quote currency into account as well. Plus, timing is extremely important. You can use charting tools and an economic calendar for indications of when to open or close a trade.
Key Forex Definitions
The following are forex-related definitions that you should familiarise yourself with when trading online:
Pip – Generally the lowest increment in which a currency pair is priced.
Spread – The difference between the Buy/Sell (Bid/Ask) price for a currency pair. Leverage – Allows you to trade higher amounts with less capital.
Exchange Rate – The value of a base currency against a quoted currency.
Bid – The price at which the market maker/broker is willing to buy the currency pair. Ask – The price at which the market maker/broker is willing to sell the currency pair.
Popular FX Trading Pairs
The bulk of FX trading is priced against the USD, which has long been regarded as the world’s official base currency. As mentioned above, all Major Currency Pairs (or Majors) are traded against the USD, and are generally regarded as the most popular currency pairs to trade. Many Cross-Currency Pairs (or Crosses) also experience heavy trading flows including EUR/CHF, EUR/GBP, and AUD/JPY.
In general, the top traded currency pairs are:
EUR/USD – This is the most widely-traded pair with the highest volume and deepest liquidity. To learn more about the EUR/USD currency pair.
GBP/USD – This is a popular currency pair that tends to be more volatile than EUR/USD. Volatility in GBP/USD has been higher in recent times due to the effects of “Brexit” (Britain’s exit from the EU) and the economic uncertainty this has created. To learn more about the GBP/USD currency pair.
USD/JPY – This is the second most traded currency pair by volume behind the EUR/USD. It experiences high volume due to the size of Japan’s economy and its role in global economic trade. Due to its geographical location, trade in JPY can also reflect economic and geopolitical conditions in the wider Asian region. To learn more about the USD/JPY currency pair.