What is Forex?

What is Forex?

Foreign exchange (or Forex as it is more commonly known) is a multi-trillion dollar industry with millions of participants worldwide.

In essence, Forex is the art of simultaneously buying one currency and selling another. The value of each currency will rise (appreciate) and fall (depreciate) due to a number of external economic and political factors.

The goal for traders is to speculate on which way Forex prices are likely to change, thereby profiting from the fluctuations between currencies. It is practically a 24/7 industry, with the markets opening Monday morning in Australia, and closing Friday evening in America.

About currency pairs

Forex is quoted in terms of one currency versus another. Each pair has a base and counter currency, and it is the trader's job to determine how the base will perform against its counterpart.

If the price of a currency pair falls, it acts as an indicator that the counter currency is appreciating, while the base currency is depreciating. Traders will buy a currency pair if they believe that the base currency will appreciate against the counter currency and sell if they think the opposite is going to happen.

Each currency has its own three-letter symbol, usually derived from the name of the country and the name of its national tender. For example, US Dollar is USD and Great British Pound is GBP. The only real exception to this rule is the Euro (EUR), since the Euro Zone is a group of countries.

Although the Swiss Franc (CHF) looks like another differentiation, it is actually an abbreviation of the Latin name of the country - Confoederatio Helvetica.

How are currency pairs displayed?

In currency pairs, the base currency is always displayed on the left and the counter is on the right. For example, if the US Dollar was the base and the Great British Pound was the counter, the pair would look like this: USD/GBP.

All currencies are divided into two categories – major and minor. The major currencies come from the strongest global economies – USA, Japan, UK, Canada, Australia, Switzerland, New Zealand and the Euro Zone.

What affects forex prices?

There are many factors that cause fluctuations between currencies, such as economic and political uncertainty, natural disasters and social unrest. Some recent examples include the global economic crisis and the “Brexit” referendum in the UK.

Announcements from major financial institutions or economic groups will also have an effect on the price of currency. You can find information about upcoming events by using the TradeFred economic calendar