As the world’s largest financial marketplace, the forex market allows participants to buy, sell, exchange, and speculate on currencies.
The forex market has a large pool of players such as banks, commercial companies, central banks, hedge funds, investment management firms, and retail forex brokers and investors.
The forex market is largely segmented into two levels: the over-the-counter (OTC) market and the interbank market.
The interbank market is where large banks trade currencies for purposes such as proprietary trading and hedging and balance sheet adjustments, on behalf of their clients, while the OTC market is where individuals trade via online platforms and brokers.
With over $6 trillion in daily transactions, the forex market depends on a sophisticated global network of banks and brokers who serve as market makers, who provide liquidity by frequently posting bids and offers for currency pairs.
What are currency pairs?
A currency is any legal tender that is in circulation in an economy, utilised to buy goods and services. Currencies are crucial to the financial health of an economy as they facilitate foreign trade and business, and are considered a store of value. In foreign exchange trading, one currency is exchanged for another at a specified exchange rate.
The currency purchased is termed the base currency while the currency sold is known as the quote currency, and the price indicates the amount of the quote currency needed in exchange for one unit of the base currency.
Following the ISO4217 standard, currencies appear as three-letter codes, which tend to be formed from two letters that stand for the region, and one that stands for the currency itself. For instance, USD stands for the United States dollar and JPY for the Japanese yen.
So, in the USD/JPY pair, you purchase the United States dollar by selling the Japanese yen.
Types of forex pairs
Many of the world’s currencies are up for trade on the forex markets and may be segmented into the following groups.
- Major Pairs – Major pairs are global currencies typically paired against the USD, and make up more than 80% of international forex trading. They are the most liquid and actively traded currency pairs globally.
- Minors (Cross pairs) – Minors are less frequently traded currencies and often feature major currencies which are quoted against other non-USD currencies. Examples of cross-currency pairs include EUR/GBP, AUD/JPY, etc.
- Exotics – These currency pairs feature major currencies paired with currencies from emerging markets or those traded with a lower volume, such as the South African Rand. The lower volume often means higher volatility, wider spreads, and increased risk.
- Regional pairs – These are currency pairs classified by geographic regions like Scandinavia or Australasia.
We can list some of the examples as:
Minor/cross currency pairs (currency pairs that don’t include the US Dollar):
What are the most traded currencies?
The ten most heavily traded currencies are also known as the G10 currencies. Often used for banking and economic transactions and speculative trading, they are among the most highly liquid currencies.
The US dollar (USD)
Denoted as the USD or “$”, the US dollar is controlled by the US Federal Reserve and is the leader in the foreign exchange market, with more than 80% of all currency transactions involving the dollar.
The USD is particularly important as the American economy is one of the largest globally, with most international trade and commodity prices in the financial markets quoted in USD.
The Euro (EUR)
The Euro is the single currency of the European Union and the second most traded currency on the globe after the US dollar.
Denoted as € with its international currency code being EUR, the Euro was introduced in 1999, with its first banknotes and coins appearing in 2002, replacing various European national currencies such as the French franc, German mark, and Italian lira.
The Euro is regulated by the ECB – the European Central Bank, a common central bank for all Eurozone states. It essentially defines monetary policy, regulates and issues money, with its head office located in Frankfurt (Germany).
The Japanese Yen (JPY)
The Japanese yen ranks in third place in the list of the world’s most-traded currencies with 16.8% of daily trades. Symbolized by ¥ and controlled by the Bank of Japan (BoJ), the Yen dates back to 1871, when it was officially instituted by the Meiji government.
With its rich history, the Yen is a highly stable currency and referred to as a “safe haven” currency with its high demand and liquidity characteristics.
The Yen is typically traded along with the USD, pound, and Euro, and are actively traded in all global sessions.
The British Pound (GBP)
Also known as the sterling pound, the British pound is the national currency of the United Kingdom and is controlled by the Bank of England (BOE). Letter coded as GBP with its currency sign being £, the pound is the fourth-most traded currency globally with a market share of approximately 12.8% in daily trades.
What are the most popular forex pairs?
EUR/USD is the most popular currency pair on the forex market featuring the two largest currencies, with transactions making up approximately 24% of daily forex trades.
The second most popular pair is USD/JPY and represents approximately 13.2% of all daily Forex transactions.
Like the EUR/USD, USD/JPY is known for its high liquidity as the JPY is the most frequently traded currency in Asia, while the USD is the most heavily traded currency globally. Other popular currency pairs to trade are AUD/USD, USD/CAD, USD/CNY, and USD/CHF, due to their influence on the world market.
Overall, the most traded currency pairs offer the highest liquidity to traders, which means that traders can benefit from tighter spreads with numerous bids and offers available at any one time.
Another reason why many people prefer to trade major currency pairs is that it’s much easier to research them. There are multiple news agencies that frequently post updates about popular currency pairs, and information about the influence of ongoing political events on them is widely available.
The forex market is larger than all of the world’s stock markets combined and is open round the clock for 5 days a week, offering numerous s opportunities for forex traders and enthusiasts.
With the large volume and high liquidity, forex trading allows for different trading styles and strategies, as well as computerised forex systems to be utilised effectively.
Although there are many players and currency pairs, a majority of the trades involve the G10 group of currencies, owing to the large influence of the countries and common occurrence in financial transactions.
Most beginners would find familiarity with these pairs and start here.
Still, each pair offers different advantages, and experienced traders familiar with the currencies would be able to find favourable plays with even the smallest of pairs. The selection of currency pairs to trade in would depend on a trader’s strategy and knowledge, as well as a risk management plan.
To find success, traders are advised to only trade what they understand and refrain from speculation.
For information and support on currency trading, reach us at Ortega Capital.