What is Forex – Chapter 1 | Learn Forex

In the current global financial scenario, the forex market is the largest growing financial market having the highest liquidity. The term forex means ‘foreign exchange’. It is also sometimes abbreviated as ‘FX’. Forex is another name of the currency market.

Traditionally, it has always been the platform through which governments, businesses, investors, travellers, and other interested parties convert or ‘‘exchange’’ their currency. At the very fundamental level, the foreign exchange market is an over-the-counter (OTC) market with no central exchange and clearing house where orders are matched.

Forex trading is a contracted form of foreign exchange trading which signifies the market in which one country’s currency is valued against that of another country’s currency. Hence, provides the foundation for the exchange of one currency with another, or to agree on a rate for any future purchase.

Country A Country B Currency Pair
Australia USA AUD/USD
Germany USA EUR/USD
England USA GBP/USD
USA Japan USD/JPY
Germany Australia EUR/AUD

Exchange Example:

While traveling to other countries, one needs to exchange their currency into that country’s valid currency, to continue using the money for traveling, shopping, etc.

When someone is traveling to Australia from the United States, then (s)he needs to buy the Australian dollar with your US dollar.

foreign exchange rate
Foreign exchange rate: conversion example

Australian dollars get quoted or valued as AUD/USD against the US dollar. Suppose an AUD/USD’s current rate is 0.7174. Then, by converting $5000 US dollar to the AUD, one will get $5000*0.7174 = 3587 AUD which one can use in Australia.

Here, AUDUSD is a forex pair. Likewise, in the above table illustration, one can see the currency pair of GBPUSD where the British pound gets quoted against the US Dollar. If one travels to the UK, (s)he needs to convert the US dollar to pound Sterling.

It is not always the case that people convert currencies only during a trip. Currency conversion happens for every global business deal, even if one needs to buy a new mattress from China living in Cyprus. Then, (s)he will have to convert his/her Euro into the Chinese Yuan (EUR/CNY).

Thus, forex currency exchange is mandatory, or shall we say that this is a crucial lifeline for all international business transactions.

Major Forex Currencies

Followings are the major forex currencies in this world:

Symbol Flag Country Currency Name Nickname
USD United States of America US Dollar Buck
EUR The European Union Euro Fiber
GBP Great Britain / England / United Kingdom British Pound / Pound sterling Cable,quad
JPY Japan Japanese Yen Yen
CHF Switzerland Swiss Franc Swissy
CAD Canada Canadian Dollar Loonie
AUD Australia Australian Dollar Aussie
NZD New Zealand New Zealand dollar Kiwi
SEK Sweden Swedish krona krona
NOK Norway, Quisling regime Norwegian krone krone

All the mentioned ten currencies are a part of the G10 currencies and are the most heavily traded currencies in the world. The majority of the forex traders purchase & sell these currencies daily. Hence, it has the highest liquidity. The term ‘G’ comes from the G-10 countries and their agreement to engage in the IMF General Arrangements to Borrow.

Reference: Wikipedia

Daily Forex Market Volume:

The forex game has evolved much over the years. In today’s scenario, it is undisputedly the largest financial market in the world, with a daily trading volume of over USD3 trillion.

Greater daily average trading volume attracts lots of opportunity for traders, especially for day traders or scalpers.


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Forex Market Liquidity

There are around thousands of forex trading brokers available for investors to invest in this market. Even big banks have their currency brokerage division. All these make the forex market the most liquid.

Mentioned official figures for daily forex turnover are obtained from the last survey done in April 2019 by Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets. Published by the Bank for International Settlements (BIS).

Source: BIS Triennial Central Bank Survey

Daily Forex Market Volume BIS
BIS: Daily Forex Market Volume (Daily averages, in millions of US dollars)

Factors That Results in Foreign Exchange Volume Growth:

1. Interest Rate Volatility:

Economic internationalization produced an important influence on interest rates. Because Interest rates are usually altered to regulate the growth in the economy, interest rate differentials have much impact on exchange rates.

forex market growth
Factors effecting Forex market volume growth

2. Global business:

In current decades the business realm has intensified, triggering a global quest for more markets, cheaper raw materials, and labor. These advances have been positive toward a foreign exchange since extra transactional layers were added.

3. Increasing of Corporate Interest:

Victorious representation of a product or service overseas may be dragged down from the profit point of view. This is due to unfavorable foreign exchange conditions. Vice versa is also applicable.

Accurate administration of the foreign exchange may improve the overall international performance of a product or service. Proper treatment of foreign exchange usually adds extensively to the rate of return. Therefore, interest in foreign exchange has grown in the past decade.

4. More Sophisticated traders:

Advancement in technology, computer software, mobile platform, and enhanced experience has improved the quality of traders’ sophistication. These boosted traders’ confidence in their ability to both create profits and appropriately manage the exchange risks.

5. IT development:

Computers perform a vital role in various stages of handling the foreign exchange. Additionally, the dealing systems and the matching systems together link all traders throughout the globe, by digitally reproducing the brokers’ market. Advanced software makes it possible to create all types of charts, augment them with refined technical education, and put them at traders’ fingertips continuously at a rather limited value.

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