The Forex market is the world’s largest market, with a trading volume of over $1.5 trillion a day. Forex trading means pairing one currency against another, predicting which one will rise or fall.
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In its most basic sense, the forex market has been around for centuries. People have always exchanged or bartered goods and currencies to purchase goods and services. However, the forex market, as we understand it today, is a relatively modern invention.
After the Bretton Woods accord began to collapse in 1971, more currencies were allowed to float freely against one another. The values of individual currencies vary based on demand and circulation and are monitored by foreign exchange trading services.
Commercial and investment banks conduct most of the trading in forex markets on behalf of their clients, but there are also speculative opportunities for trading one currency against another for professional and individual investors.
There are two distinct features to currencies as an asset class: 1. You can earn the interest rate differential between two currencies.
2. You can profit from changes in the exchange rate. An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate. Prior to the 2008 financial crisis, it was very common to short the Japanese yen (JPY) and buy British pounds (GBP) because the interest rate differential was very large. This strategy is sometimes referred to as a carry trade.
The largest market in the world
Forex trading is also known as FX Trading or Currency Trading. It refers to the central marketplace where traders exchange currencies for one another at floating rates.
The foreign exchange market consists of multiple markets, including Spot FX, Future derivatives, Forward Derivatives and CFD derivatives. The Forex market is one of the largest and most liquid financial markets in the world, with a turnover reported to exceed $5 trillion per day. Forex is open to trade 24 hours a day, 5 days a week.
The most common pairs to trade are called the ‘majors’. Examples would be the EUR/USD, GBP/USD and USD/CHF.
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ZERO Markets Forex pairs are traded as CFDs (Contract for Difference). When trading forex, you select a pair of currencies and base your trading decision on which currency’s price you think will rise or fall. Forex is traded in currency pairs, for example EUR/USD. The first currency is called the ‘base currency’ and the second is the ‘quote currency’. Currencies are displayed showing how many units of the quote currency you can buy with one unit of the base currency. This is the exchange rate.
For example, EUR/USD 1.2344 shows us that 1 Euro = 1.2344 US Dollars.
When you’re ready to trade you will choose to go long or short. In the example above, going long means that you think that the value of the Euro will rise against the US Dollar. Going short means you think it will fall.
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Trade EUR/USD
Opening Price
$1.33623 × 2 lot = $267,246
Closing Price At $1.32129 × 2 lot = $264,258Gross Profit on Trade $267,246 – $264,258 = $2,988
Closing Price At $1.34529 × 2 lot = $269,058Gross Loss on Trade $267,246 – $269,058 = -$1,812
The price of the Euro against the US Dollar (EUR/USD) is 1.33623/1.33624 and you decide to sell 2 standard lots (the
equivalent of €200,000) at 1.33623.
One week later the Euro has fallen against the US Dollar to 1.32128/1.32129 and you decide to take your profit by buying
back 2 standard lots at 1.32129; if the Euro has increased against the US Dollar to 1.34523/1.34529, the trade loses $1,812.
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| Standard account |
Super ZERO Account |
||||
|---|---|---|---|---|---|
| Symbol | PRODUCT DESCRIPTION | MIN | AVG | MIN | AVG |
| AUDCAD | Australian Dollar vs Canadian Dollar | 1.1 | 2.65 | 0.2 | 1.75 |
| AUDCHF | Australian Dollar vs Swiss Franc | 1.6 | 2.65 | 0.7 | 1.75 |
| AUDJPY | Australian Dollar vs Japanese Yen | 1.1 | 2.08 | 0.2 | 1.18 |
| AUDNZD | Australian Dollar vs New Zealand Dollar | 1.1 | 3.12 | 0.2 | 2.22 |
| AUDUSD | Australian Dollar vs Us Dollar | 1.1 | 1.66 | 0.0 | 0.2 |
| CADCHF | Canadian Dollar vs Swiss Franc | 1.5 | 2.72 | 0.6 | 1.82 |
| CADJPY | Canadian Dollar vs Japanese Yen | 1.2 | 2.24 | 0.3 | 1.34 |
| CHFJPY | Swiss Franc vs Japanese Yen | 1.1 | 2.75 | 0.2 | 1.85 |
| EURAUD | Euro vs Australian Dollar | 1.1 | 2.71 | 0.2 | 1.81 |
| EURCAD | Euro vs Canadian Dollar | 1.5 | 2.72 | 0.6 | 1.82 |
| EURCHF | Euro vs Swiss Franc | 1.3 | 2.31 | 0.4 | 1.41 |
| EURGBP | Euro vs Great Britain Pound | 1.1 | 1.67 | 0.1 | 0.3 |
| EURJPY | Euro vs Japanise Yen | 1.1 | 1.89 | 0.1 | 0.89 |
| EURNOK | Euro vs Norwegian Kroner | 5.2 | 47.61 | 4.3 | 46.71 |
| EURNZD | Euro vs New Zealand Dollar | 1.2 | 4.75 | 0.3 | 3.85 |
| EURPLN | Euro vs Polish Zloty | 1.7 | 22.65 | 0.8 | 21.75 |
| EURSEK | Euro vs Swedish Krona | 6.6 | 46.3 | 5.7 | 45.4 |
| EURSGD | Euro vs Singapore Dollar | 1.6 | 4.32 | 0.7 | 3.42 |
| EURTRY | Euro vs Turkish Lira | 1.6 | 18.45 | 0.7 | 17.55 |
| EURUSD | Euro vs Us Dollar | 1.0 | 1.2 | 0.0 | 0.1 |
| EURZAR | Euro vs South African Rand | 12.5 | 87.57 | 11.6 | 86.67 |
| GBPAUD | Great Britain Pound vs Australian Dollar | 1.6 | 3.93 | 0.7 | 3.03 |
| GBPCAD | Great Britain Pound vs Canadian Dollar | 1.1 | 3.94 | 0.2 | 3.04 |
| GBPCHF | Great Britain Pound vs Swiss Franc | 1.4 | 3.35 | 0.5 | 2.45 |
| GBPJPY | Great Britain Pound vs Japanese Yen | 1.1 | 2.47 | 0.2 | 1.57 |
| GBPNZD | Great Britain Pound vs New Zealand Dollar | 1.6 | 7.01 | 0.7 | 6.11 |
| GBPSEK | Great Britain Pound vs Swedish Krona | 8.1 | 62.82 | 7.2 | 61.92 |
| GBPSGD | Great Britain Pound vs Singapore Dollar | 1.2 | 6.49 | 0.3 | 5.59 |
| GBPUSD | Great Britain Pound vs Us Dollar | 1.1 | 1.85 | 0.2 | 0.95 |
| NZDCAD | New Zealand Dollar vs Canadian Dollar | 1.6 | 3.37 | 0.7 | 2.47 |
| NZDCHF | New Zealand Dollar vs Swiss Franc | 1.8 | 3.15 | 0.9 | 2.25 |
| NZDJPY | New Zealand Dollar vs Japanese Yen | 1.5 | 2.68 | 0.6 | 1.78 |
| NZDSGD | New Zealand Dollar vs Singapore Dollar | 1.6 | 4.92 | 0.7 | 4.02 |
| NZDUSD | New Zealand Dollar vs Us Dollar | 1.1 | 2.13 | 0.2 | 1.23 |
| USDCAD | Us Dollar vs Canadian Dollar | 1.1 | 2.07 | 0.2 | 1.17 |
| USDCHF | Us Dollar vs Swiss Franc | 1.1 | 2.22 | 0.2 | 1.32 |
| USDCNH | Us Dollar vs Chinese Yuan | 4 | 16.15 | 3.1 | 15.25 |
| USDHKD | Us Dollar vs Hong Kong Dollar | 1.9 | 10.94 | 1 | 10.04 |
| USDJPY | Us Dollar vs Japanese Yen | 1.0 | 1.2 | 0.0 | 0.2 |
| USDKRW | US Dollar vs South Korean won | 0.68 | 0.40 | ||
| USDNOK | Us Dollar vs Norwegian Krone | 5.2 | 34.52 | 4.3 | 33.62 |
| USDPLN | Us Dollar vs Polish Zloty | 3.9 | 21.2 | 3 | 20.3 |
| USDSEK | Us Dollar vs Swedish Krona | 5.2 | 27.87 | 4.3 | 26.97 |
| USDSGD | Us Dollar vs Singapore Dollar | 0.3 | 3.8 | 0.1 | 2.9 |
| USDTRY | Us Dollar vs Turkey Lira | 1.7 | 11.52 | 0.8 | 10.62 |
| USDZAR | Us Dollar vs South African Rand | 4.8 | 65.19 | 3.9 | 64.29 |
Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside of their domestic market. Foreign exchange markets provide a way to hedge currency risk by fixing a rate at which the transaction will be completed.
To accomplish this, a trader can buy or sell currencies in the forward or swap markets in advance, which locks in an exchange rate. For example, imagine that a company plans to sell U.S.-made blenders in Europe when the exchange rate between the euro and the dollar (EUR/USD) is €1 to $1 at parity.
The blender costs $100 to manufacture, and the U.S. firm plans to sell it for €150—which is competitive with other blenders that were made in Europe. If this plan is successful, then the company will make $50 in profit per sale because the EUR/USD exchange rate is even. Unfortunately, the U.S. dollar begins to rise in value vs. the euro until the EUR/USD exchange rate is 0.80, which means it now costs $0.80 to buy €1.00.
The problem facing the company is that while it still costs $100 to make the blender, the company can only sell the product at the competitive price of €150—which, when translated back into dollars, is only $120 (€150 × 0.80 = $120). A stronger dollar resulted in a much smaller profit than expected.
The blender company could have reduced this risk by short selling the euro and buying the U.S. dollar when they were at parity. That way, if the U.S. dollar rose in value, then the profits from the trade would offset the reduced profit from the sale of blenders. If the U.S. dollar fell in value, then the more favourable exchange rate would increase the profit from the sale of blenders, which offsets the losses in the trade.
Hedging of this kind can be done in the currency futures market. The advantage for the trader is that futures contracts are standardized and cleared by a central authority. However, currency futures may be less liquid than the forwards markets, which are decentralized and exist within the interbank system throughout the world.
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