Forex, or the foreign exchange market, is the global financial market for currency trading. The forex market determines the relative values of different currencies and is unique in a number of ways. Boasting the most liquid of any financial market in the world, the forex market consists of every type of trader from the big investment banks to retail investors to governments.
Since the forex market encompasses the whole world, investors can trade on it 24 hours a day except on weekends when it closes. Because of the sheer amount of monetary volume and its global reach, the forex market is often referred as the market that has the most fair competition except in cases of currency intervention by governments or central banks.
This recently happened when Switzerland’s government capped the franc at 1.20 per euro to help strengthen their export markets.
The forex market also has lower margins of profit compared to stocks and options. That’s why you hear about leveraged forex accounts a lot. A leveraged forex account basically means you are being loaned money by a broker in order for you to make more profits off a small amount of money. Now this may sound great and it is when you are making money – the problem is that when you lose more than whatever you yourself put into the account, you owe that back to the broker. Luckily, the forex markets are not as volatile as say penny stocks and usually pairs don’t move more than 1% in any given day.
Currencies on the forex market are traded in pairs. Below we’ll take a quick look at each major pair and a live chart showing the movement between them.
Forex Trading Pairs
This currency pair indicates how many U.S. dollars is needed to purchase one Euro. This pair is probably the most traded out of all the major pairs and is referred to as the “euro.” Recently both currencies have come under enormous pressure for various reasons. The Euro because of the sovereign debt crisis that continues to plague much of Europe. The U.S. dollar has suffered because of record breaking budget deficits, two wars, high unemployment and the sub-prime mortgage real estate crisis. This pair fluctuates based on forex traders concerns on whether the Eurozone or the U.S. is in worst shape. Lately as you can see in the chart above, traders are more worried about the sovereign debt crisis in Europe.
For the rest of the major pairs we’ll post the chart and take a quick look at them.
The GBP/USD currency pair is known as the “cable” and indicates how many how many U.S. dollars it takes to buy 1 British Pound.
Known as the “ninja” it indicates how many Japanese Yen it takes to buy 1 U.S. dollar.
Referred to as the “loonie” it indicates how many Canadian Dollars are needed to buy 1 U.S. dollar.
Nicknamed the “aussie” it indicates how many U.S. dollars are needed to buy 1 Australian dollar.