Forex

Forex stands for Foreign Exchange. It refers to the global market of currency pairs. It is the exchange where currencies are bought, sold, and traded against each other. Interested parties are allowed to trade 24/5. Forex is considered one of the largest financial markets, with a total daily transaction of $5 trillion.

UNDERSTANDING Currency Pairs

Any forex transaction is made of the exchange of one currency for another one.

These are called currency pairs. In this pair, one is called the “base currency”, and the other is the “quoted one.”

Let’s see in detail the most famous currency pair of the currency market, EUR/USD.

Forex Terminology

  • A position is the term used to show that a trade is in progress.
  • A long position is when a trader has taken a buying action, expecting that the value of the currency will increase.
  • When the trader sells that currency back, in the best case scenario, with a higher price, his long position is closed and this trade is completed.
  • A short position means that a trader sells the currency, hoping that its value will decrease, and wait to buy it again at a lower price.
  • When the trader buys back the asset, hopefully with a lower price, the trade is closed.
  • A short position means that a trader sells the currency, hoping that its value will decrease, and wait to buy it again at a lower price.
  • When the trader buys back the asset, hopefully with a lower price, the trade is closed.

What are the most popular currency pairs in the market?

There are seven most popular currency pairs called the majors. Other pairs, called minors or exotic, are less liquid and less traded.

MAJORS

Majors are the most traded assets, making around 80% of trade volume on forex. These currencies have high liquidity and low volatility. They come from developed, well organized economies. They have lower spreads compared to other pairs.

CROSSES

Cross pairs are the ones that do not contain the American currency, USD. Typically, they are less liquid and more volatile compared to the majors. The most commonly traded are derived from Minor currency pairs (e.g. EUR/GBP, EUR/JPY, GBP/JPY.)

EXOTICS

Exotic pairs are derived from smaller economies, coming in pairs with a major currency. Compared to the other two currencies, exotics pairs are much riskier since they are less liquid, more volatile.