Forex trading sounds frightening but you will leave with a different impression after this article.
Foreign Exchange, or Forex in short, is the business of trading currencies. Think about changing money for your last holiday overseas. You exchanged your local currency to the currency of your holiday destination (eg SGD to USD).
What affects the prices of currencies?
The exchange rate of a currency against another currency is often a reflection of the condition of the country’s economy compared to the economy of another country.
If you are optimistic on the future economy of the USA and are less optimistic on the future economy of Japan, then you will buy USD and sell Japanese Yen (JPY).
Major currencies in the world
The above 8 currencies are responsible for the majority of the trading activity in the Forex market.
Much of the world’s economic trading also revolved around these 8 countries, with the exception of China which has been omitted from the list because trading of the Chinese Yuan is controlled by the People’s Bank of China (PBOC).
From the graph, we are able to see that USD is involved in the majority of currency trading activities, representing nearly 85% of the transactions.
This is then followed by the EUR, JPY and GBP.
Trading Currencies in Pairs
The table above lists all the major currency pairs that can be traded. They make up a whopping 75% of all trading volume! These 7 currency pairs are also known as “majors”.
Did you notice that USD is in every major currency pair? USD makes up about 75% of all trading transactions, so it is right to conclude that USD is the king in the Forex market.
The pairs that are not listed above are known as “crosses”. AUD/CAD, EUR/GBP, EUR/JPY, GBP/JPY are examples of crosses.
Conclusion
Great! You are familiar with the major currencies which traders focus on, that Forex is always traded in pairs, and the less known trading pairs are called crosses.
Come back for our next article which will be on the major players in the Forex market and how that will affect you as a retail trader.
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