If you’re new to trading, the word Forex might be unfamiliar to you. Forex refers to the largest financial market in the world, the Foreign Exchange market. Forex is popular with investors and traders as it is the most liquid of all of the financial markets.
With Forex you are able to speculate on the strength of one nation’s currency against another nation’s currency. Foreign Exchange is traded in pairs, the first currency listed being the Base Currency, and the second being the Quote Currency. For example with the EUR/USD you are speculating on the strength of the Euro versus the United States Dollar. If EUR/USD is listed at 1.12, that means that it costs $1.12 USD to purchase one Euro.
When trading Forex, an investor will open a position on a currency pair based on which currency they believe will appreciate in value. If the investor believes the EUR will rise against the USD, they will purchase the EUR/USD. If the Foreign Exchange moves in their favor they will make a profit, however if it moves against them they will make a loss.
A currency is always traded in relation to a secondary currency. If traders were to sell one currency, they are in turn purchasing another. When trading Forex electronically there is no physical exchange of money. Instead traders often open a position on a specific currency pair in the hopes that there will be some movement in the strength or weakness of the pair.
Unlike others, this market is not centralized, instead it is an electronic network of brokers and banks. Due to differing time zones, the Forex market is open 24 hours a day, 5 days a week. Some currency pairs are even open to trade on holidays, assuming at least one of the countries or global markets is in operation. Additionally, the investor has the option to trade popular currency pairs such as EUR/USD and USD/CAD, or exotic pairs including JPY/NOK and AUD/MXN.
To summarize, Forex is an extremely liquid market where investors are able to speculate on the value of a Base Currency against a Quote Currency. The Foreign Exchange market can be attractive to investors due to the constant movement of currency prices and the 24/5 market hours. One of the main causes of consistently large rate movements in the forex market are NFP reports. We have prepared an article explaining NFP reports and how they affect the forex rates.