Forex Trading – Introduction to forex trading

In 1944 44 nation along with USA developed new international monetary system “Bretton Woods System”, for further details please refer to Wikipedia. The basic idea behind this system was to tie diffrent currencies to US Dollar that is convertible into gold (X US Dollars per ounce of gold).

Price of a particular currency is determined on the basis of demand and supply for that currency.

Forex market is the place where different currencies are traded against one another, and this article we explore basis of forex market to understand it better.

Average daily turnover in the global foreign exchange market from 1998 to 2019 Source: statista

YeearAverage daily turnover (in trillion US dollars)
19981.5
20011.2
20041.9
20073.3
20103.9
20135.3
20165.0
20196.5
Average daily turnover in the global foreign exchange market from 1998 to 2019 Source: statista

Global Foreign Exchange (Forex) market operations time

From Monday to Fridayforex market operates *24 Hours a day throughout the globe, as forex market from one region of the world closes the market from another region opens. Following table a picture summaries the opening and closing of forex markets in different regions of the world.

Forex MarketOpening Time (GMT))Closing Time (GMT))
Sydney22:0006:00
Tokyo24:0009:00
London08:0016:00
New York13:0022:00
Global Foreign Exchange (Forex) market operations time

Understanding the structure of Forex market

Forex market participants can be divided into following levels.

Level 1: Interbank

At this level banks exchanges currencies with each other.

Level 2: Forex Brokers

Forex brokers are linked with the banks and offer forex trading services to their clients.

Level 3: Forex Traders

Forex traders are the retail forex traders who trade in different currencies using Forex brokers.

Forex market participants are generaly divided into following categories.

  1. Central Banks and Governments
  2. Financial Institutes like Commercial Banks
  3. Commercial Companies
  4. Speculators

Forex Trading pairs

Pairs are used to trade in forex market, to buy one currency you will have to sell equivalent of another currency.

To buy GBP (British pound sterling) you will sell USD (United States Dollar)

  • The first currency in the pair is called the base currency, in above example GBP is the base currency.
  • The second currency in the pair is known as quote currencyUSD in above example is the quote currency.

Above pair will be known as GBPUSD.

A simple trade scenario

  • Current market price for  GBPUSD pair is 1.4100 to buy one GBP (the base currency).
  • This means you will have to give USD 1.4100 (the quote currency) to buy one GBP (the base currency).

Major Currency Pairs

Following are the major currency pairs traded in forex market, these major pairs represent almost 80% of the daily trade volume on global forex market .

PairDescriptionNick Name
EUR/USDEuro / United States DollarEuro
USD/JPYUnited States Dollar / Japanese YenGopher
GBP/USDBritish Pound Sterling / United States DollarCable
USD/CHFUnited States Dollar / Swiss FrancSwissie
USD/CADUnited States Dollar / Canadian DollarLoonie
AUD/USDAustralian Dollar / United States DollarAussie
NZD/USDNew Zealand Dollar / United States DollarKiwi

Crosses

Currency pairs not involving USD directly are known as crosses, to trade in such currency pairs you will trade first a pair that involves USD.

Example

TO trade EURO/JPY pair you will have to.

  1. Exchange EUR to USD using EUR/USD pair.
  2. Covert USD to JPY using the USD/JPY pair.

Some of the common cross pairs are.

PairDescription
GBP/JPYBritish Pound Sterling / Japanese Yen
EUR/JPYEuro / Japanese Yen
AUD/JPYAustralian Dollar / Japanese Yen
NZD/JPYNew Zealand Dollar / Japanese Yen
EUR/GBPEuro / British Pound Sterling
NZD/AUDNew Zealand Dollar / Australian Dollar
EUR/CHFEuro / Swiss Franc

Consider following before trading in crosses.

  • Crosses are normally considered risky.
  • Crosses are not heavily traded so they are less liquid (in comparison of major pairs).
  • Crosses are more volatile.
  • Crosses are considered easy to manipulate.

Exotics

Currency pairs involving one of the currency of an evolving economy are known as exotics.

Following is the list of some exotics.

PairDescription
EUR/TRYEuro / Turkish Lira
USD/TRYUnited States Dollar / Turkish Lira
USD/DKKUnited States Dollar/ Danish Krone
USD/HKDUnited States Dollar / Hong Kong Dollar
USD/SGDUnited States Dollar / Singapore Dollar
USD/MXNUnited States Dollar / Mexican Peso

That’s it, hope you enjoyed it. You like this article, have any questions or suggestions please let us know in the comments section.

Thanks and Happy Learning!


This article is part of a series on Beginner’s guide to online stock, forex and commodity trading.

** Thumbnail and Post Image By Business vector created by gstudioimagen – www.freepik.com

Shoket Mahmood Ahmed

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