Foreign exchange (forex) is the process of changing one currency into another, in its simplest form. This can be done for a variety of reasons, such as commerce, trading, or tourism. When it comes to trading, forex is the world’s largest financial market, with a huge average daily trading volume of US$5 trillion.
Many traders use forex to diversify their trading portfolio. Speculating on geopolitical events, traders can also use forex to hedge against volatility in another currency pair, or to counteract interest rate risk.
Let’s explore the different types of forex trading, forex pairs, and what is the best forex platform, to get you started.
Different types of forex trading
In traditional forex trading, currencies are traded in standard sizes, known as lots. There are four common lot sizes:
- Standard — standard forex accounts allow you to trade up to $100,000 worth of currencies in one lot.
- Mini — mini forex accounts allow you to trade up to $10,000 worth.
- Micro — micro forex accounts allow you to trade up to $1,000 worth of currencies.
- Nano — some brokers also offer nano lot sizes, worth 100 units of the currency to traders.
Theoretically, the bigger the lot size, the higher the potential profits, and losses.
On top of this, there are three primary markets within the world of forex. These include:
- Spot forex market — this is a physical exchange of a currency pair, taking place on the spot date.
- Forward forex market — the forward forex market is an over-the-counter contract to buy or sell a set amount of a currency at a certain price, at a set date in the future.
- Forex futures market — a forex futures contract is an exchange-traded contract to either buy or sell a specific amount of a particular currency at a set date in the future, at a predetermined price.
Understanding forex pairs
A forex quote consists of two currencies; the base currency and the quote currency. For example, a typical currency pair may be listed as EUR/USD 1.14. Here, the Euro (EUR) is the base currency, and the US Dollar (USD) is the quote currency.
The currency pair can be a reflection of one economy’s strength in comparison to the other. Technical, political, and economic events can all have an effect on each currency, so it’s important to bare this in mind when forex trading.
The most popular pairs to trade
The single most widely-traded forex pair in the market is the Euro to US Dollar (EUR/USD). After this, the US Dollar to Japanese Yen (USD/JPY) is one of the most popular currency pairs. Generally, this pair has very high liquidity, however JPY is often seen as a safe currency during periods of global economic uncertainty. Events in China and Korea can also have an impact on the JPY.
The third most popular pair is the British Pound to US Dollar (GBP/USD). This currency pair is also sometimes known as ‘Cable’, as it was the first currency pair to be traded via telephone lines and cables that crossed the Atlantic Ocean.
Despite being two of the largest western economies, and sharing a very strong relation, there is ongoing uncertainty surrounding the UK’s plans to exit the EU. Brexit has continued to affect forex trading and the GBP/EUR currency pair, even though the transition period has now ended.
How to trade forex
Trading forex can be risky and complex, so it’s important to do extensive research before taking your stance on the ever-changing market. Once you feel confident, however, you’ll want to set up a brokerage account, and develop a strategy.
A good trading strategy should be based on your situation and finances, taking into account the amount you are willing to budget for trading, and incidentally, put at risk. You should always check your positions regularly, and it’s best not to let your emotions get the better of you.
Forex trading can be a volatile environment, but can offer great rewards to those who are willing, and know how, to take the risk.
