Forex: The largest market in the world



The foreign exchange market (also known as the “FX” or “forex” market) is the largest market in the world, with an average daily turnover of around $6 trillion in 2020. Because there are so many market participants, it is a highly liquid market which means it is easy to enter and exit a trade.

A Forex Trade Consists of Two Markets



Because currencies are traded in “pairs”, it means that whenever a trader enters a long position, they are buying one currency (bullish) whilst simultaneously selling (shorting) another.

For example, if a trader enters a long (buy) trade on USD/JPY, they are buying USD and selling JPY (Japanese yen). Yet if they were to short USD/JPY, they are then selling USD and buying JPY.

MAKE TRADING SIMPLE

Group Currency Pairs

We can group forex pairs into three main categories, based on their trading volumes, volatility levels and association with the USD.

Major Pairs

These currency pairs account for around three quarter of all trading volume. As they are the most liquid pairs, they tend to have the tightest spreads but volatility is not always the highest when compared with other groups.

Examples include

EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY, USD/CHF and USD/CAD.

Minor / Cross-
Currency Pairs

Minor pairs are also referred to as crosses (or cross-currency pairs). Their trading volumes are still high, but not as much as the majors. They generally provide higher levels of volatility than majors which some traders find attractive.

Examples include

EUR/JPY, EUR/GBP, NZD/CAD, AUD/GBP, CAD/CHF.

Exotic Pairs

Exotic pairs tend to include currencies from emerging markets. Their trading volumes can at times be very low, and they can go through periods of very high volatility. And their swap rates (overnight interest rates) can also be high.

Examples include

USD/SEK, USD/NOK, USD/ZAR, USD/MXN, EUR/TRY.

MAKE TRADING SIMPLE

How to Trade the Forex Market

Loosely speaking, there are three ways to approach trading
Using technical analysis

Traders will use charts to study historical price behaviour, to try and predict the future direction of a market. Typically, they will perform trend analysis and find areas of probably support and resistance. But many also use indicators to help highlight trading signals or potential trend reversals.

Fundamental analysis

These traders will study economic data, central bank and government policies to try and predict future performance of currency pairs. Of course, many will also use technical analysis to help enter the trade, but the main focus for their trade ideas come from fundamental analysis.

Automated trading

These traders ignore all fundamentals and automate their trading. Using computer code to create trading robots (or expert advisors within MT4) they can fully automate trading strategies.