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
| Yeear | Average daily turnover (in trillion US dollars) |
|---|---|
| 1998 | 1.5 |
| 2001 | 1.2 |
| 2004 | 1.9 |
| 2007 | 3.3 |
| 2010 | 3.9 |
| 2013 | 5.3 |
| 2016 | 5.0 |
| 2019 | 6.5 |
Global Foreign Exchange (Forex) market operations time
From Monday to Friday, forex 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 Market | Opening Time (GMT)) | Closing Time (GMT)) |
|---|---|---|
| Sydney | 22:00 | 06:00 |
| Tokyo | 24:00 | 09:00 |
| London | 08:00 | 16:00 |
| New York | 13:00 | 22:00 |
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.
- Central Banks and Governments
- Financial Institutes like Commercial Banks
- Commercial Companies
- 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 currency, USD 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 .
| Pair | Description | Nick Name |
|---|---|---|
| EUR/USD | Euro / United States Dollar | Euro |
| USD/JPY | United States Dollar / Japanese Yen | Gopher |
| GBP/USD | British Pound Sterling / United States Dollar | Cable |
| USD/CHF | United States Dollar / Swiss Franc | Swissie |
| USD/CAD | United States Dollar / Canadian Dollar | Loonie |
| AUD/USD | Australian Dollar / United States Dollar | Aussie |
| NZD/USD | New Zealand Dollar / United States Dollar | Kiwi |
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.
- Exchange EUR to USD using EUR/USD pair.
- Covert USD to JPY using the USD/JPY pair.
Some of the common cross pairs are.
| Pair | Description |
|---|---|
| GBP/JPY | British Pound Sterling / Japanese Yen |
| EUR/JPY | Euro / Japanese Yen |
| AUD/JPY | Australian Dollar / Japanese Yen |
| NZD/JPY | New Zealand Dollar / Japanese Yen |
| EUR/GBP | Euro / British Pound Sterling |
| NZD/AUD | New Zealand Dollar / Australian Dollar |
| EUR/CHF | Euro / 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.
| Pair | Description |
|---|---|
| EUR/TRY | Euro / Turkish Lira |
| USD/TRY | United States Dollar / Turkish Lira |
| USD/DKK | United States Dollar/ Danish Krone |
| USD/HKD | United States Dollar / Hong Kong Dollar |
| USD/SGD | United States Dollar / Singapore Dollar |
| USD/MXN | United 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.
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