Foreign exchange, or forex, is the world's largest financial market; it is a market with a huge average daily trading volume of $5 trillion. Plus500 offers 24-hour CFD trading on FX pairs, opening at 08:00 Sydney time on Monday mornings, and running through to 16:00 New York time on Friday afternoon. In basic terms, forex refers to the purchase of one currency against another. Plus500 offers CFD trading on over 70 different currency pairs.
In the world of forex, there are 3 primary markets:
As mentioned above, forex focuses on the trading of currency pairs, and can be defined as the simultaneous purchase of one currency against another. Forex takes place mainly on the OTC market; however, it is also traded on futures exchanges.
Currency pairs generally fall into 4 main categories: Majors, Minors, Crosses and Exotics. Major Currency Pairs always involve the US Dollar (USD) being traded against other major currencies, namely the Euro (EUR), the British Pound (GBP) the Swiss Franc (CHF), the Japanese Yen (JPY), the Canadian Dollar (CAD), the Australian Dollar (AUD), and the New Zealand Dollar (NZD). Minors and crosses involve one of the majors against a range of currencies that are traded at smaller quantities.
FX movements can reflect a number of different fundamentals including economic growth, international trade flows and changes in interest rates.
Before trading, you need to learn how to read a currency pair. The first currency is known as the ‘Base’ and the second currency is known as the ‘Quote’. For instance, if you were to buy the EUR/USD currency pair, it means you are buying euros while selling dollars. Should the euro strengthen against the dollar, then you would make a profit. Conversely, should the euro fall against the dollar, then you would lose money.
The exchange rate is reflected in the quote currency. So, if the EUR/USD is trading at a rate of 1.1322, it means that 1,000 euros can be exchanged for 1,132.20 dollars.
There are many different factors that can affect the forex market. Below you can find a few:
Of course, this is not as straightforward in practice. You need to integrate a variety of indicators and take the quote currency into account as well. Plus, timing is extremely important. You can use charting tools and an economic calendar for indications of when to open or close a trade.
The following are forex-related definitions that you should familiarise yourself with when trading online:
It may also be helpful to learn the nicknames of the popular foreign exchange pairs. For example, GBP/USD is commonly named ‘Cable’, and EUR/USD is called ‘Fibre’. In addition, trading the USD/JPY currency pair is known as trading the ‘Ninja’, USD/CHF is called ‘Swissy’, and USD/CAD is referred to as ‘Loonie’.
The bulk of FX trading is priced against the USD, which has long been regarded as the world’s official base currency. As mentioned above, all Major Currency Pairs (or Majors) are traded against the USD, and are generally regarded as the most popular currency pairs to trade. Many Cross-Currency Pairs (or Crosses) also experience heavy trading flows including EUR/CHF, EUR/GBP, and AUD/JPY - to mention a few.
In general, the top traded currency pairs are:
The seven major pairs make up over 80% of the total FX trading. Crosses are currency pairs that do not involve the USD, such as EUR/GBP, AUD/NZD and EUR/CHF. Exotics are major currencies paired against a smaller, less liquid economy, such as EUR/TRY (Euro to Turkish Lira) or USD/MXN (US Dollar to Mexican Peso).
When choosing a currency pair to trade, you should test your strategy either with a popular FX pair, or with your local currency against the USD, on our free, unlimited Demo Account. Be cautious and diligent in your trades, and open small trades initially to carefully observe how the market is performing over time.
Plus500 offers CFD trading on the world’s leading currency pairs. Our user friendly yet advanced online CFD platform includes a free demo account, a wide variety of educational resources and trading tools that are made available to new and experienced traders alike. Our spreads are among the lowest in the industry and the intuitive platform is designed for ease of use, without compromising on in-depth analytical insights and sophisticated trading options.
This article contains general information which doesn't take into account your personal circumstances.