The foreign exchange market, commonly known as Forex or FX, is the global marketplace where currencies are bought and sold. Unlike traditional stock markets that operate during specific hours, the Forex market operates nearly 24 hours a day, five days a week. It connects banks, financial institutions, corporations, governments, and individual traders from different parts of the world.
How Does Forex Trading Work?
Forex trading involves exchanging one currency for another. Currencies are always traded in pairs, such as EUR/USD, GBP/USD, or USD/JPY. The first currency is called the base currency, while the second is known as the quote currency.
For example, if EUR/USD is trading at 1.1000, this means that one euro is worth 1.10 US dollars. If a trader expects the euro to strengthen against the dollar, they may buy the EUR/USD pair. If they expect the euro to weaken, they may sell the pair.
What Moves Currency Prices?
Currency prices are influenced by many factors. Interest rates are particularly important because higher interest rates can make a currency more attractive to investors seeking higher potential returns. Central bank decisions, inflation, employment data, economic growth, and political developments can also influence exchange rates.
Market sentiment is another important factor. During periods of uncertainty, traders may move toward currencies that are traditionally viewed as safer or more liquid. This can cause significant movements in major currency pairs.
Major, Minor, and Exotic Pairs
Forex pairs are commonly divided into three categories. Major pairs involve the world’s most actively traded currencies and usually include the US dollar. Examples include EUR/USD, GBP/USD, and USD/JPY.
Minor pairs involve major currencies but do not include the
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