What's Forex

Think the stock market is huge? Think again. Learn about the LARGEST financial market in the world and how to trade in it.

What Is Traded In Forex?

The simple answer is MONEY.
Because you’re not buying anything physical, forex trading can be confusing.
Think of buying a currency as buying a share in a particular country, kinda like buying stocks of a company.
The price of the currency is usually a direct reflection of the market’s opinion on the current and future health of its respective economy.
In forex trading, when you buy, say, the Japanese yen, you are basically buying a “share” in the Japanese economy.
You are betting that the Japanese economy is doing well, and will even get better as time goes. Once you sell those “shares” back to the market, hopefully, you will end up with a profit.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country’s economy, compared to other countries’ economies.
By the time you graduate from this School of Pipsology, you’ll be eager to start working with currencies.

Major Currencies

Symbol	Country	Currency	Nickname
USD	United States	Dollar	Buck
EUR	Eurozone	Euro	Fiber
JPY	Japan	Yen	Yen
GBP	Great Britain	Pound	Cable
CHF	Switzerland	Franc	Swissy
CAD	Canada	Dollar	Loonie
AUD	Australia	Dollar	Aussie
NZD	New Zealand	Dollar	Kiwi

Currency symbols always have three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.
Take NZD for instance. NZ stands for New Zealand, while D stands for dollar. Easy enough, right?
The currencies included in the chart above are called the “majors” because they are the most widely traded ones. We’d also like to let you know that “buck” isn’t the only nickname for USD.
There’s also: greenbacks, bones, benjis, benjamins, cheddar, paper, loot, scrilla, cheese, bread, moolah, dead presidents, and cash money.
So, if you wanted to say, “I have to go to work now.”
Instead, you could say, “Yo, I gotta bounce! Gotta make them benjis son!”
Or if you wanted to say, “I have lots of money. Let’s go to the shopping mall in the evening.”
Instead, why not say, “Yo, I gots mad scrilla! Ima head to the mall later.”
Did you also know that in Peru, a nickname for the U.S. dollar is Coco, which is a pet name for Jorge (George in Spanish), a reference to the portrait of George Washington on the $1 note?

They call me Coco yo!

Buying And Selling In Currency Pairs

Forex trading is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer, and are traded in pairs.
For example the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).

When you trade in the forex market, you buy or sell in currency pairs.
Imagine each currency pair constantly in a “tug of war” with each currency on its own side of the rope. Exchange rates fluctuate based on which currency is stronger at the moment.

Major Currency Pairs

The currency pairs listed below are considered the “majors.”
These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded.
The majors are the most liquid and widely traded currency pairs in the world.

Currency Pair	Countries	FX Geek Speak
EUR/USD	Eurozone / United States	“euro dollar”
USD/JPY	United States / Japan	“dollar yen”
GBP/USD	United Kingdom / United States	“pound dollar”
USD/CHF	United States/ Switzerland	“dollar swissy”
USD/CAD	United States / Canada	“dollar loonie”
AUD/USD	Australia / United States	“aussie dollar”
NZD/USD	New Zealand / United States	“kiwi dollar”

Major Cross-Currency Pairs or Minor Currency Pairs

Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the “crosses.”
Major crosses are also known as “minors.”
The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.

Euro Crosses

Currency Pair	Countries	FX Geek Speak
EUR/CHF	Eurozone / Switzerland	“euro swissy”
EUR/GBP	Eurozone / United Kingdom	“euro pound”
EUR/CAD	Eurozone / Canada	“euro loonie”
EUR/AUD	Eurozone / Australia	“euro aussie”
EUR/NZD	Eurozone / New Zealand	“euro kiwi”

Yen Crosses

Currency Pair	Countries	FX Geek Speak
EUR/JPY	Eurozone / Japan	“euro yen” or “yuppy”
GBP/JPY	United Kingdom / Japan	“pound yen” or “guppy”
CHF/JPY	Switzerland / Japan	“swissy yen”
CAD/JPY	Canada / Japan	“loonie yen”
AUD/JPY	Australia / Japan	“aussie yen”
NZD/JPY	New Zealand / Japan	“kiwi yen”

Pound Crosses

Pair	Countries	FX Geek Speak
GBP/CHF	United Kingdom / Switzerland	“pound swissy”
GBP/AUD	United Kingdom / Australia	“pound aussie”
GBP/CAD	United Kingdom / Canada	“pound loonie”
GBP/NZD	United Kingdom / New Zealand	“pound kiwi”

Other Crosses

Pair	Countries	FX Geek Speak
AUD/CHF	Australia / Switzerland	“aussie swissy”
AUD/CAD	Australia / Canada	“aussie loonie”
AUD/NZD	Australia / New Zealand	“aussie kiwi”
CAD/CHF	Canada / Switzerland	“loonie swissy”
NZD/CHF	New Zealand / Switzerland	“kiwi swissy”
NZD/CAD	New Zealand / Canada	“kiwi loonie”

Exotic Currency Pairs

No, exotic pairs are not exotic belly dancers who happen to be twins. Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico or Hungary.
The chart below contains a few examples of exotic currency pairs. Wanna take a shot at guessing what those other currency symbols stand for? Depending on your forex broker, you may see the following exotic currency pairs so it’s good to know what they are.
Keep in mind that these pairs aren’t as heavily traded as the “majors” or “crosses,” so the transaction costs associated with trading these pairs are usually bigger.

Currency Pair	Countries	FX Geek Speak
USD/HKD	United States / Hong Kong
USD/SGD	United States / Singapore
USD/ZAR	United States / South Africa	“dollar rand”
USD/THB	United States / Thailand	“dollar baht”
USD/MXN	United States / Mexico	“dollar peso”
USD/DKK	United States / Denmark	“dollar krone”
USD/SEK	United States / Sweden
USD/NOK	United States / Norway

It’s not unusual to see spreads that are two or three times bigger than that of EUR/USD or USD/JPY. So if you want to trade exotics currency pairs, remember to factor this in your decision.

Forex Market Size And Liquidity

Unlike other financial markets like the New York Stock Exchange (NYSE) or London Stock Exchange (LSE), the forex market has neither a physical location nor a central exchange.
The forex market is considered an Over-the-Counter (OTC), or “Interbank” market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
This means that the spot forex market is spread all over the globe with no central location. Trades can take place anywhere as long you have an Internet connection! The forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations.
In the OTC market, participants determine who they want to trade with depending on trading conditions, the attractiveness of prices, and reputation of the trading counterpart.
The chart below shows the seven most actively traded currencies.
The dollar is the most traded currency, taking up 84.9% of all transactions.
The euro’s share is second at 39.1%, while that of the yen is third at 19.0%.
As you can see, most of the major currencies are hogging the top spots on this list!


*Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%
The chart above shows just how often the U.S. dollar is traded in the forex market. It is on one side of a ridiculous 84.9% of all reported transactions!

The Dollar is King in the Forex Market

You’ve probably noticed how often we keep mentioning the U.S. dollar (USD).
If the USD is one-half of every major currency pair, and the majors comprise 75% of all trades, then it’s a must to pay attention to the U.S. dollar. The USD is king!
In fact, according to the International Monetary Fund (IMF), the U.S. dollar comprises roughly 64% of the world’s official foreign exchange reserves! Because almost every investor, business, and central bank own it, they pay attention to the U.S. dollar.

There are also other significant reasons why the U.S. dollar plays a central role in the forex market:

• The United States economy is the LARGEST economy in the world.
• The U.S. dollar is the reserve currency of the world.
• The United States has the largest and most liquid financial markets in the world.
• The United States has a stable political system.
• The United States is the world’s sole military superpower.
• The U.S. dollar is the medium of exchange for many cross-border transactions. For example, oil is priced in U.S. dollars. Also called “petrodollars.” So if Mexico wants to buy oil from Saudi Arabia, it can only be bought with U.S. dollar. If Mexico doesn’t have any dollars, it has to sell its pesos first and buy U.S. dollars.

Speculation in the Forex Market

One important thing to note about the forex market is that while commercial and financial transactions are part of the trading volume, most currency trading is based on speculation.
In other words, most of the trading volume comes from traders that buy and sell based on intraday price movements.

The trading volume brought about by speculators is estimated to be more than 90%!
The scale of the forex market means that liquidity – the amount of buying and selling volume happening at any given time – is extremely high.
This makes it very easy for anyone to buy and sell currencies.
From the perspective of a trader, liquidity is very important because it determines how easily price can change over a given time period.
A liquid market environment like forex enables huge trading volumes to happen with very little effect on price, or price action. While the forex market is relatively very liquid, the market depth could change depending on the currency pair and time of day.
In our forex trading sessions part of the school, we’ll tell you how the time of your trades can affect the pair you’re trading.
In the meantime, here are a few tricks on how you can trade currencies in gazillion ways. We even narrowed it down to four!

The Different Ways To Trade Forex

Because forex is so awesome, traders came up with a number of different ways to invest or speculate in currencies.
Among these, the most popular ones are spot forex, currency futures, currency options, and currency exchange-traded funds (or ETFs).

Currency Futures

Futures are contracts to buy or sell a certain asset at a specified price on a future date (That’s why they’re called futures!).
FX futures were created by the Chicago Mercantile Exchange (CME) way back in 1972, when bell bottoms and platform boots were still in style. Since futures contracts are standardized and traded on a centralized exchange, the market is very transparent and well-regulated. This means that price and transaction information are readily available.

Currency Options

An “option” is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option’s expiration date.
If a trader “sold” an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date. Just like futures, options are also traded on an exchange, such as the Chicago Mercantile Exchange (CME), the International Securities Exchange (ISE), or the Philadelphia Stock Exchange (PHLX).
However, the disadvantage in trading FX options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.

Currency ETFs

Exchange-traded funds or ETFs are the youngest members of the forex world.
A currency ETF offers exposure to a single currency or basket of currencies. Here’s a list of the most popularly traded currency ETFs.
ETFs are created and managed by financial institutions who buy and hold currencies in a fund. They then offer shares of the fund to the public on an exchange allowing you to buy and trade these shares just like stocks. Like currency options, the limitation in trading currency ETFs is that the market isn’t open 24 hours. Also, ETFs are subject to trading commissions and other transaction costs.

Spot Forex Market

In the spot market, currencies are traded immediately or “on the spot,” using the current market price. What’s awesome about this market is its simplicity, liquidity, tight spreads, and round-the-clock operations.
It’s very easy to participate in this market since accounts can be opened with as little as $50! (Not that we suggest you do) – you’ll learn why in our Capitalization lesson!
Aside from that, most forex brokers usually provide charts, news, and research for free.
In the School of Pipsology, when it comes to the specific way to trade currencies, we’ll be primarily talking about the spot forex market.

Why Trade Forex?

Want to know some reasons why traders love the forex market? Read on to find out what makes it so attractive!

Why Trade Forex: Advantages Of Forex Trading

There are many benefits and advantages of trading forex.
Here are just a few reasons why so many people are choosing this market:

No commissions

No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the “bid/ask spread“.

No middlemen

Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.

No fixed lot size

In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces.
In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we’ll explain later why a $25 account is a bad idea).

Low transaction costs

The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course, this depends on your leverage and all will be explained later.

A 24-hour market

There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps.
This is awesome for those who want to trade on a part-time basis because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.

No one can corner the market

The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.

Leverage

In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on. While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

High Liquidity.

Because the forex market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade.
You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).

Low Barriers to Entry

You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options or futures, it doesn’t. Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $25.
We’re not saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.

Free Stuff Everywhere!

Most online forex brokers offer “demo” accounts to practice trading and build your skills, along with real-time forex news and charting services.
And guess what?! They’re all free!
Demo accounts are very valuable resources for those who are “financially hampered” and would like to hone their trading skills with “play money” before opening a live trading account and risking real money.
Now that you know the advantages of the forex market, see how it compares with the stock market!

Why Trade Forex: Forex vs. Stocks

There are approximately 2,800 stocks listed on the New York Stock exchange. Another 3,100 are listed on the NASDAQ.
Which one will you trade? Got the time to stay on top of so many companies?
In spot currency trading, there are dozens of currencies traded, but the majority of market players trade the four major pairs. Aren’t four pairs much easier to keep an eye on than thousands of stocks?
Look at Mr. Forex. He’s so confident and sexy. Mr. Stocks has no chance!
That’s just one of the many advantages of the forex market over the stock markets. Here are a few more:

24-Hour Market

The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 4:00 pm EST until Friday at 4:00 pm EST, with customer service usually available 24/7.
With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.

Minimal or No Commissions

Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone.
Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market. Most brokers are compensated for their services through the bid/ask spread.

Instant Execution of Market Orders

Your trades are instantly executed under normal market conditions. Under these conditions, usually the price shown when you execute your market order is the price you get.
You’re able to execute directly off real-time streaming prices (Oh yeeeaah! Big time!).

Keep in mind that many brokers only guarantee stop, limit, and entry orders under normal market conditions. Trading during a massive alien invasion from outer space would not fall under “normal market” conditions. Fills are instantaneous most of the time, but under extraordinarily volatile market conditions, like during Martian attacks, order execution may experience delays.

Short-Selling without an Uptick

Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving.
Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.

No Middlemen

Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen.
Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers.
Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs.

Buy/Sell programs do not control the market.

How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling.
In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small.
Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.

Analysts and brokerage firms are less likely to influence the market

Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as “buy,” when the stock was rapidly declining?
It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPOs are big business for both the companies going public and the brokerage houses.
Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear.
Foreign exchange, as the prime market, generates billions in revenue for the world’s banks and is a necessity of the global markets. Analysts in foreign exchange have very little effect on exchange rates; they just analyze the forex market.

Advantages	Forex	Stocks
24-Hour Trading	YES	No
Minimal or no Commission	YES	No
Instant Execution of Market Orders	YES	No
Short-selling without an Uptick	YES	No
No Middlemen	YES	No
No Market Manipulation	YES	No

In the battle between forex vs. stocks, it looks like the scorecard between Mr. Forex and Mr. Stocks shows a strong victory by Mr. Forex! Will it go for 2-0 with Mr. Futures?

Why Trade Forex: Forex vs. Futures

It’s not just the stock market. The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks.
But wait, there’s more… So much more!

Liquidity

“Mr. Futures, our short shorts look cool!”

In the forex market, $5.3 trillion is traded daily, making it the largest and most liquid market in the world.This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market.
The futures market trades a puny $30 billion per day. Thirty billion? Peanuts!
The futures markets can’t compete with its relatively limited liquidity.
The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage, with exception to extremely volatile market conditions.

24-Hour Market

At 5:00 pm EST Sunday, trading begins as markets open in Sydney.
At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST.
And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST.
Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market! As a trader, this allows you to react to favorable or unfavorable news by trading immediately.
If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride.
Overnight markets in futures contracts do exist, and while liquidity is improving, they are still thinly traded relative to the spot forex market.

Minimal or no commissions

With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions.
But really, the commission fees are peanuts compared to what you pay in the futures market. The competition among spot forex brokers is so fierce that you will most likely get the best quotes and very low transaction costs.

Price Certainty

When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution.
Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.

Guaranteed Limited Risk

Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account.
Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account. During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level).
In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account. That sucks.

Advantages	Forex	Futures
24-Hour Trading	YES	No
Minimal or no Commission	YES	No
Up to 500:1 Leverage	YES	No
Price Certainty	YES	No
Guaranteed Limited Risk	YES	No

Judging by the Forex vs. Futures Scorecard, Mr. Forex looks UNBEATABLE! Now meet the winners who trade the forex market.