Forex is the abbreviation for “foreign exchange,” and it is commonly used to describe trading in the foreign exchange market. The forex market is a global decentralized marketplace where the relative values of different currencies are determined through the interaction of demand and supply. Unlike stock markets, there is no centralized depository or exchange where transactions happen. Instead, these transactions are conducted by numerous market participants like banks, brokers and foreign exchange dealers at several locations. Currencies are traded in pairs, i.e., there is simultaneous buying of one currency and selling of another. A forex trader will buy a currency pair if he expects its exchange rate to rise in future and sell a currency pair if the exchange rate is expected to fall over time. A trader has the option to buy or sell any currency pair, at any given time, subject to available liquidity. So if a forex trader expects the euro to weaken in value relative to the U.S. dollar, he will sell the euro and buy the dollar (sell EUR/USD). If the dollar strengthens, the purchasing power to buy the euro will increase. The trader can now buy back more euros, earning a profit in the process.
The major currency pairs, with their nicknames, are listed in the table below:
The foreign exchange market is the world’s largest financial marketplace. One of the biggest advantages of forex trading is the sheer volume of geographically-dispersed market participants, who help generate liquidity that cannot be matched by any regulated exchange-traded instrument.