What does Forex stand for?
Forex or FX stands for Foreign Exchange and is a massive global market for trading or changing international currencies against one another. The FX market is one of the most popular in the world with around $6.6 trillion in volume traded every day. This easily makes it the world’s largest securities market by volume.
When trading FX, investors exchange one currency for another, so prices are generally quoted as pairs and displayed similarly. For example when exchanging or trading Euro and US dollars, the pair is listed as EUR/USD. The wider FX market determines the value or “exchange rate” between each currency pair which means the price may move up or down depending on a wide range of macro and geopolitical factors. This means that one currency may strengthen or weaken against another; a concept all too familiar to holiday makers when travelling abroad.
For listed currency pairs there is always a price included as well, for example 1.03. If we use the same example above of the EUR/USD pair, this price reflects the cost of 1 Euro in US Dollars. If the price increases, to say 1.10, then we know that the Euro has strengthened as it now costs 1.10 US dollars for a single Euro.
Forex markets are always traded in pairs and there are a huge number of potential markets available. However most significant trading happens on what are known as “major pairs” which represent some of the world’s bigger economies. These include pairs like:
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- USD/CHF (US Dollar/ Swiss franc)
There are other significant FX pairs which are also heavily traded globally, these include:
- AUD/USD (Australian Dollar/US Dollar)
- USD/CAD (US Dollar/ Canadian Dollar)
- NZD/USD (New Zealand Dollar/US Dollar)
What exactly is the Forex Market?
The forex market is made up of an established list of major and exotic currency pairs. We’ve already covered the “majors” which account for the most significant trading volume, but what about the “exotics,” or less well known currency pairings?
Some of the most traded exotic FX pairs include:
- ZAR/JPY (South Africa Rand/Japanese Yen)
- USD/ZAR (US Dollar/South Africa Rand)
- USD/TRY (US Dollar/Turkish Lira)
- USD/SGD (US Dollar/Singapore Dollar)
- USD/SEK (US Dollar/Swedish Krona)
- USD/RUB (US Dollar/Russian Ruble)
- USD/RON (US Dollar/Romanian Leu)
- USD/PLN (US Dollar/Polish Zloty)
- USD/NOK (US Dollar/Norwegian Krone)
- USD/MXN (US Dollar/Mexican Peso)
- USD/ILS (US Dollar/Israeli Shekel)
- USD/HUF (US Dollar/ Hungarian Forint)
- USD/CZK (US Dollar/Czech Republic Koruna)
- TRY/JPY (Turkish Lira/Japanese Yen)
- SGD/JPY (Singapore Dollar/Japanese Yen)
- NOK/JPY (Norwegian Krone/Japanese Yen)
- MXN/JPY (Mexican Peso/Japanese Yen)
- GBP/TRY (British Pound/Turkish Lira)
- GBP/SGD (British Pound/Singapore Dollar)
- GBP/SEK (British Pound/Swedish Krona)
- GBP/PLN (British Pound/Polish Zloty)
- GBP/NOK (British Pound/Norwegian Krone)
- GBP/MXN (British Pound/Mexican Peso)
- GBP/CZK (British Pound/Czech Republic Koruna)
- EUR/ZAR (Euro/South Africa Rand)
- EUR/TRY (Euro/Turkish Lira)
- EUR/SGD Singapore Dollar)
- EUR/SEK (Euro/Swedish Krona)
- EUR/RUB (Euro/Russian Ruble)
- EUR/PLN (Euro/Polish Zloty)
- EUR/NOK (Euro/Norwegian Krone)
- EUR/CZK (Euro/Czech Republic Koruna)
- CHF/SGD (Swiss Franc/Singapore Dollar)
- CHF/SEK (Swiss Franc/Swedish Krona)
- CAD/SGD (Canadian Dollar/Singapore Dollar)
- AUD/SGD (Australian Dollar/Singapore Dollar)
- AUD/SEK (Australian Dollar/Swedish Krona)
- AUD/PLN (Australian Dollar/Polish Zloty)
- AUD/NOK (Australian Dollar/Norwegian Krone)
The Forex market then is very broad and offers plenty of opportunities for investors and traders to explore different levels of volatility. By trading FX pairs as a CFD (speculating on the underlying market rather than owning the actual asset) traders can decide whether they think the price of a specific pair, or a group of pairs, will go up or down in value.
Remember, any asset that is relatively volatile like Forex comes with risk so understanding the factors that influence price movement and the correlations between asset classes is important. Because FX is the world’s biggest market by trading volume, there is plenty of information out there to learn more about the FX pairs you are most interested in. This research is an important part of developing a stable, responsible FX trading plan which can help to mitigate some of the risk of trading FX.
Looking into Spot Markets
Spot FX is when investors trade on FX “on the spot” and the exchange of assets happens at the same point as the trade is settled. Spot FX markets can be traded in both directions, so investors can choose to Buy (go long) or Sell (so short) depending on how they feel a particular FX pair will perform.
Spot FX prices generally have narrower spreads (the spread is the difference between the buy and the sell price) and as a result are cheaper. However it is important to note that trading in the Spot FX market is for the most part dominated by technical trading which can be both swift and aggressive, so volatility within the market can be very high. Understanding the market and how to manage risk is an important part of building a sustainable Spot FX trading approach.
Forwards and Futures Markets
FX Forwards and Futures markets are more complex trading options and are essentially a contract or agreement between a buyer and seller to trade a currency pair at a specified price on a set expiry date.
FX forwards are sometimes used by investors as a hedge on existing positions, primarily because there is no overnight funding required to keep an FX forward position open. However there are downsides too, and the spreads on FX futures markets are generally wider than on other FX markets.
Use cases of Forex Markets
Forex markets offer plenty of flexibility for traders and investors who are looking to diversify their portfolio and gain wider exposure to a particular FX market. FX trading can be interesting for investors as they learn more about the interconnection between established FX pairs as well as wider market correlations between different asset classes.
Before trading FX markets, investors should have a solid understanding of these market correlations and some of the factors that influence market movement in both directions. For example, Central Bank decisions on things like interest rates and quantitative easing have significant impact on the relative strength of a currency.
Likewise geopolitical factors like elections, referendums, leadership challenges and resignations have huge implications for the FX markets as they introduce uncertainty over outcomes and introduce an element of the unknown which significantly increases volatility.
Trading behaviour and market sentiment is another key driver of FX market volatility and if the wider market believes a currency pair is significantly over or under valued, market sentiment could force a correction in price.
These are just a few of the real world scenarios that impact FX prices and there are many more including changes in key Commodities and the performance of specific Indices. All of which makes it crucial that FX traders and those looking to invest do their research to understand what drives market movement in the FX pair they want to invest in.
Are Forex Markets Volatile?
As we’ve seen already, FX markets can be extremely volatile and are impacted by a broad range of factors. Volatility and price movement in other assets like Indices and Commodities can significantly impact how volatile FX markets become. In addition, geopolitical factors, news and macro events can also see volatility within global FX markets both rise and fall.
The recent political and humanitarian crisis in the Ukraine is a good example of a global event that can drive volatility and uncertainty in specific FX pairs and traders should ensure they understand the wider implications of opening a position on any given pair.
With these risks however also come potential rewards and trading on FX volatility offers investors an opportunity to take advantage of significant rises and falls in FX pair prices. Having a strong trading plan in place and a responsible trading strategy aligned to a deep understanding of the market is key to being in a position to make the most of FX market volatility.
Best Platforms for Forex trading
There are a number of FX trading platforms available online at the moment and each has its own relative strengths as well as weaknesses. When choosing an FX trading platform there are a few factors to take into consideration including the available range of FX pairs to trade, how tight the spreads are, how much you are likely to pay in fees and how reliable and intuitive the software that drives the platform really is.
For those traders who are newer to FX trading, as well as those who want a more complete sense of control from their FX platform, Eightcap offers a wide range of over 40 major and exotic currency pairs with tight spreads from 0.0 pips. Traders can choose from the powerful MT4/MT5 platform or select the WebTrader platform. Each platform available at Eightcap comes with an advanced charting package to track market movement as well as in-depth fundamental analysis and 1 click trading direct from charts. Available on web, mobile, tablet and desktop, the platforms from Eightcap offer traders greater flexibility without compromising on security, reliability and functionality.
Learn more about Eightcap’s FX trading platform on their website, with in-depth information about functionality, charting, pricing and market availability. There is also a comprehensive Education Hub, with a wealth of information on FX trading and wider CFD trading strategies and approaches. Subscribing to Eightcap’s Week Ahead Newsletter is also an ideal way to pick up more trading insights, analysis and news on all the biggest FX trading stories and latest trends, market moves and innovations. So that you can learn more about what moves the market as well as finding ideas and market opportunities across asset classes including FX, Indices, Crypto and Commodities.