The Forex market is where currencies are traded. It is the largest, and most accessible trading market in the world. Although, the forex market was dominated by institutional firms and large banks, which acted on behalf of clients, it has however, become more retail-oriented in recent years, where traders and investors have begun participating in it. The daily trading volume of the Forex market is above $5 trillion where participants in this market include institutions, investment banks, commercial banks, and retail investors. Out of the $5 trillion, retail trader transactions contribute 5% to 6%, (about $400 billion) while the rest of the transaction volume is from large institutions and businesses.
Currency Pairs
A currency pair is a quotation of two different currencies, where the value of one is quoted against the other. The first listed currency within a currency pair is called the base currency, while the second currency that is the benchmark is called the quote currency. Currency pairs are compared against one another in order to understand how much of the quote currency is required to buy one unit of the base currency. A three-letter symbol is usually used in identifying currency pairs. For instance, to represent the Canadian dollar in international markets, it is defined as “CAD” while the Australian Dollar in international markets is defined as “AUD”. In summary, when trading currencies, investors are selling one currency in order to buy another.
Base and Quote Currencies
The base currency is considered the first currency within the currency pair quotation, while the second part of the quotation is regarded as the quote currency. Currency pairs are often presented as 6 letters with a dash, for instance; EUR/USD. In this case, EUR is the base currency, while USD is the quote currency.
For Example:
Base/Quote
EUR/USD = 1.2500
The above means that one euro is exchanged for 1.2500 U.S. dollars.
USD/JPY = 150
This means that one U.S. dollar can be exchanged for 150 yen.
As shown, forex trading involves the constant buying and selling of currency. When buying a currency pair, investors purchase the base currency by selling the quote currency. On the other hand, when the currency pair is sold, the investor sells the base currency and receives the quote currency.
Major Currency Pairs
There are as many currency pairs as there are currencies in the world. All currency pairs are categorized according to the volume that is traded on a daily basis for a pair. The currencies that trades the most volume against the U.S. dollar are referred to as the major currencies, and they include;
- EUR/USD or the Euro vs. the U.S. dollar
- USD/JPY or dollar vs. the Japanese yen
- GBP/USD or the British pound vs. the dollar
- USD/CHF or the Swiss franc vs. the dollar
- AUD/USD or the Australian dollar vs. the U.S. dollar
- USD/CAD or the Canadian dollar vs. the U.S. dollar