The Forex OTC market is traded globally by millions of individuals and organizations. It is the biggest and most popular financial market in the world.
The chart below shows global foreign exchange activity. As of April 2007, the US Dollar is the most traded currency, being on one side or the other of 86.3% of all transactions. The Euro’s share is second at 37%, while that of the yen is at 16.5%. Yes, we know that just the three of them already exceed 100%. You have to remember that Forex is traded in currency PAIRS, and the percentages posted by the bank survey total 200%. But even so, you can see that the top three traded currencies take up a lot of the market!
The 7 most popular currencies (in order of popularity, or volume traded) along with their symbols are shown below:
| Symbol | Country | Currency |
| USD | United States | Dollar |
| EUR | Euro members | Euro |
| JPY | Japan | Yen |
| GBP | Great Britain | Pound |
| CHF | Switzerland | Franc |
| AUD | Australia | Dollar |
| CAD | Canada | Dollar |
As we stated earlier, Forex is simply buying and selling currency. Placing a trade in the FX market is very similar to those found in other markets, like the stock market, and especially the futures market. When trading on the FX market, you exchange one currency for another and as the price changes, your purchase willl increase (or decrease) in value.
The first thing you need to understand is that FX Trading means you are actually trading currency pairs. You are buying one currency while simultaneously selling another currency. Above we showed you the 7 most popular currencies traded on the market and referred to trading pairs. Here are the 7 most commonly traded PAIRS in the Forex market:
- EUR/USD which stands for Euro / US Dollar
- USD/JPY which stand for US Dollar / Japanese Yen
- GBP/USD which stands for British Pound / US Dollar
- USD/CAD which stands for US Dollar / Canadian Dollar
- AUD/USD which stands for Australian Dollar/US Dollar
- USD/CHF which stands for US Dollar / Swiss Franc
- EUR/JPY which stands for Euro / Japanese Yen
The reason these are the most commonly traded pairs is simple. Only the most economically/politically stable and liquid currencies are demanded in sufficient quantities. The good news is that even with just these seven pairs, you can find more than enough potentially profitable trades to make you financially successful.
FX Quotes
Reading a foreign exchange quote is simple if you remember two things:
- The first currency listed is the base currency.
- The value of the base currency is always 1.
As the centerpiece of the forex market, the US dollar is usually considered the base currency for quotes. When the base currency is USD, think of the quote as telling you what a US dollar is worth in that other currency.
When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. Rising quotes mean a US dollar can now buy more of the other currency than before.
Majors not based on the US dollar
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.
In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
Cross currencies
Currency pairs that don’t involve USD at all are called cross currencies, but the premise is the same.
Because they are quoted in pairs, and because you are simultaneously buying and selling one currency for another, it is important to understand the quoting system. Brokers will have a chart showing the current quote which may show something like this:
EUR/USD 1.5536
It is the current exchange rate for a pair that you might have experience with if you have ever travelled to another country. The first listed currency to the left is known as the base currency (in this example, the Euro Dollar), while the second one on the right is called the counter currency (in this example, the U.S. Dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.5536 U.S. dollars to buy 1 Euro Dollar.
When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.5536 U.S. dollars when you sell 1 Euro Dollar.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the Euro and simultaneously selling the US Dollar. If you sell EUR/USD, this means you are selling the Euro while simultaneously buying the US Dollar.
You would buy the pair if you believe the base currency will appreciate (go up) relative to the counter currency. You would sell the pair if you think the base currency will depreciate (go down) relative to the counter currency.
Sometimes it can be difficult to understand this concept due to the dual pricing structure of the Forex market. For all intents and purposes, you can generally consider the pair as a single entity, just like stocks or futures, and buy or sell based on whether you think the price for the pair will go up or down.
When you buy a pair, you are expecting the price to go up in order to make a profit. This is also known as “going long” or entering a “long position”. When you sell a pair, you are expecting the price to go down in order to make a profit. This is also known as “going short” or entering a “short position”. We will explain more on this a bit later on.
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