The forex market is one of the essential financial forces in the world. It is much larger than even the stock market. In fact, the daily exchanges in this market amount to $5 trillion. This is because the forex market essentially deals directly with money. It is all about the exchange of one currency for another.
The value of currencies is in constant flux, meaning there is always an opportunity to make a trade. It is also an incredibly accessible market, because, as we said, it deals directly with money. Everyone in the modern world has money, and exchanging it to another currency is rather simple. In fact, it is quite likely that you yourself have exchanged money in the past. This is especially true if you’ve ever travelled abroad. Albeit, the process is somewhat different when you deal directly with the Forex market. The market is open 24 hours a day, 5 days a week (no inclusion of weekends), so it is available often. All of these reasons are why the market for exchanging currency is just so large.
It is worth noting though, that currencies only change in value relative to each other. There is no one standard to trade them against. This is the reason why forex traders focus on currency pairs. Each trader chooses a pair, or several pairs, of interest to them and trades them as prices fluctuate.
The only real downside of the forex market is the trading costs. Although the forex market is in constant flux, most of the differences in value are rather small. As a result, the costs associated with trading currencies could quickly eat into your profits. This means that if you want to make any significant profit in the forex market, you have to exchange in large volumes, or else take advantage of significant price swings.
The underlying factors of forex markets
The forex market, having its basis on currency, reflects the performance of economies. Therefore, when people are exchanging currencies for profit, they are essentially making a bet on the relative performance of economies.
The currency pairs
All currencies have representations with a three-letter shorthand. For example, the US dollar is USD. The euro is the EUR. One can then combine these shorthands together to represent a currency pair. So a euro and us dollar pairing would look like this, EUR/USD. In this example, one is exchanging from the euro to a dollar. This is just one of the important currency pairs. Others include the GBP/USD, the JPY/USD, and the AUD/USD. As you can see, the predominance of the US dollar in the forex market is pretty important. This is because of the importance the US economy has in the world. In fact, the US dollar is a standard that people use across the world. As a result, it is very stable, and quite easy to exchange against. It is also a safe-haven currency, which people use in times of distress.
However, there are plenty more popular currency pairs that do not rely on the US dollar. Here are a few examples: GBP/JPY, EUR/CHF, GBP/CAD.
There are also a few important ‘exotic’ currencies out there in the forex market. Their ‘exoticness’ comes from the fact that they come from emerging markets. In other words, from places one would not traditionally expect to trade. As a result, trading these sorts of currencies on standard accounts is quite difficult. Most exchanges do not expect you to be looking into these kinds of currencies. Because they are so unusual, they are also low in exchange volume. As would be expected. Some examples of these currencies could be the Thai baht, the Singapore dollar, or the Iraqi dinar. Due to the ubiquity of the dollar, it is best to trade these kinds of currencies against it. By doing this, you will ensure that at least one of the currencies is stable, as the stability of the exotic currency is unknown.
The final type of currencies are the BRIICS currencies. This is a grouping of five major emerging economies. In fact, the name is an acronym of all these countries: Brazil, Russia, India, Indonesia, China, and South Africa. Technically speaking, these are still exotic pairs in most circles. However, they are still far more reliable than your average exotic pair.
- Trading Instrument