Travelled Overseas Before?
We Aussies love travelling, this means, when we travel to another country (let’s say Bali), you usually exchange your money (AUD Australian Dollar) into the foreign currency (IDR Indonesian Rupiah) to spend money there, right? When you convert a particular currency in-to another country’s currency, this is called forex, which basically stands for Foreign Currency Exchange (FX).
Forex Market’s is HUGE
The daily trading volume in the FOREX Market has reached an average of $6.6 trillion in 2024. To give you a better idea, consider the entire Australian Stock Exchange ASX market stats which are only in billions of Australian dollars, not in trillions.
Structure of the Foreign Exchange Market
The forex market is decentralised, meaning, there is no single clearing center. FX trading happens everywhere, all the time. The foreign exchange market, commonly known as the FX market, is responsible for determining the prices of global currencies. This plays a crucial role in the buying and selling of goods, services, and financial assets across international borders.
Beyond its essential function in trade and investment, professional market participants regard currencies as a distinctive asset class. The FX market draws in a wide range of participants, from major financial institutions to individual traders worldwide who actively contribute to the fluctuations in global currency values. Learn more the structure of forex markets here.
In FX Currencies Come in Pairs
You’re always trading one currency against another, such as the US dollar against the Australian dollar (USD/AUD). This is called a forex pair. Understanding how currency pairs behave is essential for making insightful FX trading decisions.
There Are Always Potential Opportunities
Forex is an exceptionally liquid market, and it’s reacting all the time. This makes it especially attractive to day traders looking for short-term wins.
There’s No Centralised Exchange
Unlike stocks which use exchanges such as the Australian Stock Exchange, FX is traded by a decentralised global network of banks and retail forex brokers.
The FX Market Never Sleeps
You can trade forex 24 hours a day, 5 days a week, from Sunday 5PM to Friday 5PM. This is because the time zones of the four trading centers (London, New York, Sydney, and Tokyo) overlap with each other. So, when one closes, another opens.
How Forex Trading Works
Before we dig into the details, let’s take a look at a simplified forex trade as an example.
Trading AUD/USD
You believe that the value of the Aussie Dollar will drop against the US dollar, because the US has reported strong economic growth.
So, you buy AUD/USD, meaning you’re buying US dollar while trading your Australian Dollar.
Scenario 1: Your analysis was spot on and the AUD drops against the USD
Your position increases in value and you decide to close your trade and take your profit.
Scenario 2: Your analysis was wrong and the AUD value increases against the USD
Your position decreases in value, you decide to close your trade and take your loss.
Understanding Currency Pairs
Forex is always traded in currency pairs, such as AUD/USD. This is because a currency cannot be speculated against itself; its value is always in relation to another currency.
But why does the AUD/USD pair look the way it does?
Every currency in forex trading is signified by three letters. These are known as the ISO 4217 Currency Codes.
The first two letters denote the country. The third represents the currency name.
- AUD = Australian dollar
- USD = United States dollar
Forex Currency Pair Nicknames
As you become immersed in the world of foreign exchange market, the currency pairs are often referred to by their nicknames. Here are just a few:
- AUD/USD – Aussie
- NZD/USD – Kiwi
- GBP/USD – Cable
- EUR/CHF – Swissy
- EUR/USD – Fiber
Types of Currency Pairs
FX pairs are categorised into three types: majors, minors, and exotics.
Major Currency Pairs
As the name suggests, the ‘majors’ are the most popular traded currency pairs. They account for around 85% of the total FX trading volume and are represented by some of the world’s largest economies.
About a quarter of all forex trades are in EUR/USD.
- EUR/USD – the Euro versus the US dollar
- AUD/USD – the Australian dollar versus the US dollar
- USD/JPY – the US dollar versus the Japanese yen
- NZD/USD – the New Zealand dollar versus the US dollar
- USD/CAD – the US dollar versus the Canadian dollar
Some currencies are traded more often than others, since the world is built on USD dollars for trade, it is the most traded currency.
Typically you’ll find the major pairs to have the tightest spreads (Spread in FX is the difference between the sell and the buy prices). This makes them less costly to trade than other forex pairs.
Minor Currency Pairs
Minor pairs are currency pairs that don’t include the US dollar. They are also known as cross pairs. Examples include:
- EUR/GBP – the Euro versus British pound sterling
- EUR/CHF – the euro versus the Swiss franc
- GBP/AUD – British pound sterling versus the Australian dollar
- GBP/JPY – British pound sterling versus the Japanese yen
- CAD/JPY – the Canadian dollar versus Japanese yen
- CHF/JPY – the Swiss franc versus the Japanese yen
- EUR/NZD – the euro versus the New Zealand dollar
As they are less traded than the major pairs (meaning the market is not as liquid), the spreads are usually wider than the major currency pairs.
Exotic Currency Pairs
Exotic currency pairs consist of a major currency and a much less traded one, such as the US dollar versus the Chinese yuan (USD/CNH).
Many of the smaller currencies are from developing countries, or small nations with strong economies. They often come with the largest spreads as they are the least traded type of pair. Examples include:
- $ USD/Mex$ – the US dollar versus the Mexican peso
- $ USD/THB฿ – the US dollar versus the Thai baht
- £ GBP/TRL₺ – British pound sterling versus the Turkish Lira
- £ GBP/SEK – British pound sterling versus the Swedish krona
- € EUR/RON – the euro versus the Romanian leu
Exotic FX pairs are more suitable for experienced traders. Due to the economic and political instability of some nations, they present a greater risk (and potentially greater rewards) than the other pair types.
Why Trade in Forex?
Apart from the obvious, there are a few good reasons why some traders prefer to trade forex than commodities, gold or stocks. It can be very profitable for experienced traders, it can be fun as well. Unlike Australian the stock market which is limited by exchange’s opening hours, forex market is open 24-hours a day, five days a week.
Why Learn the Ins-and-Outs First?
Just like any form of investment, educating yourself about the inner workings of Forex will ensure that you are better informed about the buying, holding and or selling your currency pairs. This means, your investment decision and returns will yield greater profits and minimise your risk.
Best Trading Apps
MetaTrader 4 (MT4) & MetaTrader 5 (MT5) is an electronic trading platform widely used by online retail foreign exchange speculative traders. Developed by MetaQuotes, MetaTrader is the one of the most popular trading platform offering advanced charting tools and customisable interface, MetaTrader remains a top choice for traders seeking comprehensive analysis and execution capabilities.