What is forex – currency trading – What is forex ?
The foreign exchange market or forex market is considered one of the largest financial markets in the world in terms of liquidity, with an average trading volume of over $5 trillion per day.
Forex is one of the types of direct trading, which is an abbreviation of the term Foreign Exchange Market, that is, exchanging one currency for another, often with the aim of making a profit.
In addition, the foreign exchange market is one of the most dynamic and active financial markets, as it offers its users high levels of liquidity that most other markets lack.
Currency pairs and trading rates
Currencies in the foreign exchange market are traded in pairs such as the British Pound against the U.S. Dollar, the U.S. Dollar against the Euro, in order to make profits through spreads.
Forex exchange rates are determined by the rate of supply and demand, while the price differences between them are known as the spread. Below we will show the most common currency pairs in the forex world:
- Euro/US Dollar is designated by the symbol (USD/EUR).
- British Pound/US Dollar is designated by the symbol (USD/GBP).
- US Dollar/Japanese Yen (JPY/USD).
- Euro/Japanese Yen (JPY/EUR).
- Australian Dollar/US Dollar referred to as (USD/AUD).
- New Zealand dollar/US dollar, referred to as (USD/NZD).
- Canadian dollar/U.S. dollar, denoted by the symbol (USD/CAD).
The foreign exchange market has many different currencies from around the world, and the foreign currencies in the market are divided into major currencies, minor currencies, and western pairs. The major pairs include the 7 most popular pairs mentioned above, while in the minor pairs, the major currencies are traded against each other, except for the US dollar, while the western pairs have one major and one minor currency such as USDNOK and EURTRY.
The major currencies are entirely dependent on the world’s most powerful economies such as the United States, Japan, Switzerland, the Eurozone, Canada, the United Kingdom, and New Zealand.
The trading price of a currency pair is the value of the quoted currency that you can buy for one unit of the base currency.
For example, the Euro and the U.S. dollar are the most popular and most traded currency pair in the foreign exchange market. When you look up the exchange rate of the Euro to the US dollar, you want to know how many dollars (the quote currency) you can buy for 1 Euro (the base currency).
- If the EUR/USD exchange rate is 1.2356, that means you can buy 1.2356 USD for every 1 EUR.
- If the exchange rate is trending upwards, it means that the base currency is strengthening against the secondary currency.
- But if the exchange rate is in a downward trend, it means that the base currency is weakening against the secondary currency.
On the other hand, spreads change according to the popularity of each currency pair, which is determined by the daily trading volume of that pair, and the volume of liquidity and spreads are usually linked to a direct relationship, which means that the higher the liquidity rate leads to lower spreads and vice versa.
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