Learn How the Foreign Exchange Market (Forex) Works
Forex (short for foreign exchange) is the global market where currencies are bought and sold. It’s the largest and most liquid financial market in the world, with over $7.5 trillion traded daily. Unlike stocks or commodities, the forex market operates 24 hours a day, five days a week, and spans across major financial centers, from London to New York to Tokyo.
Understanding Forex Trading
Forex trading involves buying one currency while simultaneously selling another. These are always traded in pairs, such as EUR/USD (the euro vs. the US dollar). The value of a currency constantly fluctuates due to factors like economic data, interest rates, political events, and market sentiment. Traders aim to profit by predicting how these exchange rates will move.
For example, if you believe the euro will strengthen against the US dollar, you might buy EUR/USD. If you think the opposite, you will sell it.
What is a Currency Pair?
Every forex trade involves a currency pair, which shows the value of one currency relative to another.
A currency pair has two components:
- • A base currency (listed first)
- • A quote currency (listed second)
For example, in EUR/USD:
- • EUR is the base currency.
- • USD is the quote currency.
If the exchange rate is 1.09705, this means it takes $1.09705 to buy €1.00.
At easyMarkets, you can trade over 63 currency pairs, from the world’s most popular majors to less commonly traded exotic pairs, giving you flexibility and choice based on your strategy.
How Forex trading works
When you see a currency pair, you will find two prices:
- • Ask Price: What you pay if you want to buy the currency pair
- • Bid Price: What you receive if you want to sell the currency pair
The difference between the ask and bid price is called the spread, which is usually pretty small.
Types of currency pairs in Forex
Currency pairs fall into three categories based on the volume traded each day for a pair. These include major, minor and exotic pairs.
Major currency pairs
These are the most liquid and widely traded pairs. They all involve the US dollar and typically have tight spreads and high volatility.
Some popular examples include:
- • EUR/USD (Euro / US Dollar)
- • GBP/USD (British Pound / US Dollar)
- • AUD/USD (Australian Dollar / US Dollar)
- • USD/JPY (US Dollar / Japanese Yen)
- • USD/CHF (US Dollar / Swiss Franc)
- • NZD/USD (New Zealand Dollar / US Dollar)
- • USD/CAD (US Dollar / Canadian Dollar)
Minor (cross) currency pairs
These pairs don’t include the US dollar. While they may be slightly less liquid, they’re still quite popular and often reflect regional economic dynamics.
Examples include:
- • GBP/JPY (British Pound / Japanese Yen)
- • EUR/GBP (Euro / British Pound)
Exotic currency pairs
Exotic pairs include one major currency and one from an emerging or smaller economy. These pairs may offer more dramatic price movements, but they typically have wider spreads and higher risk.
Some examples include:
- • USD/MXN (US Dollar / Mexican Peso)
- • USD/ZAR (US Dollar / South African Rand)
- • USD/SGD (US Dollar / Singapore Dollar)
- • USD/HKD (US Dollar / Hong Kong Dollar)
- • USD/DKK (US Dollar / Danish Krone)
- • USD/SEK (US Dollar / Swedish Krona)
- • USD/NOK (US Dollar / Norwegian Krone)
How to trade Forex: The basics
Forex trading is more than just numbers on a screen. It’s about understanding how global events shape currency values in real time. From central bank decisions to breaking political news, the forex market reflects the pulse of the world economy.
When trading Forex, you can use easyMarkets intuitive platform to gain access to tools like:
- • Tight Fixed Spreads
- • Risk management tools
These tools help you stay in control, no matter how the market moves.
Final thoughts
Forex trading offers a dynamic and fast-paced environment where understanding economic trends and global news is crucial to predicting currency movements. The markets being open around the clock and vast liquidity make it an exciting option for traders around the world.
Get started with easyMarkets demo account today to practice risk free and learn Forex trading strategies.
Forex (short for foreign exchange) is the global market where currencies are bought and sold. It’s the largest and most liquid financial market in the world, with over $7.5 trillion traded daily. Unlike stocks or commodities, the forex market operates 24 hours a day, five days a week, and spans across major financial centers, from London to New York to Tokyo.
