The Forex market works through a global network of banks, companies and individuals who constantly buy and sell currencies with each other.Unlike most financial assets, such as stocks or commodities, the foreign exchange market does not have a physical location and operates 24 hours a day.
The negotiation is carried out electronically between both parties, which is called the over-the-counter market (known as OTC for its acronym in English). Currency prices constantly fluctuate in value relative to each other, potentially offering a greater number of trading opportunities.
There are four main forex trading centers: London, Tokyo, New York and Sydney.
When trading stops at one, it starts at another. However, the foreign exchange market is also traded in other cities such as Frankfurt, Hong Kong, Singapore or Paris.
Before going into Forex Trading in detail, it is important that you understand what a currency pair is and how they move.
What is a Currency Pair?
A currency is any foreign currency, that is, official currencies other than that of our own country.
Each country or region has its own currency and one way to determine its value is by comparing it to other countries. For example, if we want to know what a Euro is worth, we can compare it with the Dollar.
It is what is known as currency pairs or crosses .
For example, the Euro/Dollar pair (EUR/USD) means that we are comparing the value of a Euro with the value of a Dollar.
There are a large number of currency pairs or crosses and they are usually classified into major, minor and exotic currency pairs.
The major pairs are the most frequently traded and have the most liquidity:
EUR/USD: Euro vs US Dollar
GBP/USD: British Pound vs US Dollar
AUD/USD: Australian Dollar vs US Dollar
NZD/USD: New Zealand Dollar vs US Dollar
USD/CAD: US Dollar vs Canadian Dollar
USD/JPY: US Dollar vs Yen
Minor pairs trade less frequently and have less liquidity. Some examples are:
EUR/JPY: Euro vs Yen
AUD/NZD: Australian Dollar vs New Zealand Dollar
EUR/GBP: Euro vs British Pound
EUR/CHF: Euro vs Swiss Franc
And finally there are the exotic pairs that are crosses between a major currency and another of a small or emerging country. They are rarely traded, some examples being USD/MXN (Dollar vs Mexican Dollar) or EUR/TRY (Euro vs Turka Lira).