What you will learn in this section
Forex trading is betting one currency against another with the goal of making a profit
The forex market is worth trillions of dollars and every day billions of rands are traded locally
Currencies are traded in currency pairs and these pairs are written with three-letter alphabetic codes that comply with the ISO currency code, for example, USD stands for US dollar
What is forex trading?
Liquid & Large
When it comes to trading volumes, the forex market is the largest financial market in the world – yes, even bigger than the stock market. The daily trade volume is around $.6.6 trillion. With a low barrier to entry, and loads of buying and selling constantly taking place, the forex market is also one of the most liquid markets in the world.
Another characteristic of the forex market is that it is decentralised, so unlike the stock market, there is no physical and centralised place where it all takes place. There is, however, an online place where it all happens, and this online place is referred to as the interbank. It is a network of all the banks and retail brokers that participate in forex trading.
What is the Forex Market?
In short, the forex market is an international marketplace for foreign exchange, it is where currency is traded electronically via computer networks. You will also find it is described as over-the-counter (OTC), this means transactions between traders happen online, but not on one centralised exchange. The forex market is also referred to as the spot market (because trades happen on the spot) and the cash market.
Currencies are traded around the world, in almost every time zone, which means the market is open 24 hours a day, Mondays to Fridays, and it can be quite active any time of the day and impact price quotes constantly.
How are Currencies traded?
Currencies are traded against each other in pairs. Every forex transaction involves the purchase of one currency and the sale of another, so you can think of a currency pair as one unit – a single item that is bought and sold. Currency pairs consist of two different currencies. The first currency in the pair is your base currency, the second is your quote currency. When you purchase a currency pair from your forex broker, you buy the first currency (the base) and you sell the second currency (the quote). But when you sell the currency pair, the opposite happens; you sell the first currency (the base) and you obtain the second currency (the quote).
You will also hear people talking about quoting currencies against each other; this is just another way of saying they are compared against each other. Currency pairs are compared based on their buying (bid) and selling (ask) prices – also called the offer. Your forex broker buys the base currency at the bid price from you in return for the counter currency.
GBP/USD
EUR/USD
USD/CHF
USD/JPY
WHAT KINDS OF CURRENCIES ARE TRADED ON THE FOREX MARKET?
There are several currencies that are frequently traded together, these key players are referred to as major currency pairs. Below are some of them:
AUD/USD:
Australia /
United States
USD/CAD:
United States /
Canada
EUR/USD:
Euro Zone /
United States
USD/JPY:
United States /
Japan
GBP/USD:
United Kingdom / United States
USD/CHF:
United States /
Switzerland
You will also come across currency pairs that contain a major currency against a currency from an emerging economy like Thailand or South Africa, these are called – exotic pairs. There are also pairs that contain major currencies against each other, instead of the US dollar, for example, GBP/JPY. You can also pair currencies by region, for example, EUR/NOK or AUD/NZD.
The Short & Long (Strategies) of FX
How does Forex work?
By now you know that the foreign exchange market works with currencies, so it is also called a currency market. At the heart of forex, it is about the difference in prices between two currencies – also referred to as currency pairs. This results in a trade of currencies between two parties. Buyers anticipate one currency to increase in value against another currency, whereas sellers expect the opposite.
Banks also make up a part of the forex landscape. They participate to assist with global trade and they also provide liquidity. More specifically, central banks play a big role. These are the organisations who oversee the monetary system of a nation or a group of nations, they generally also issue currency, manage exchange reserves, regulate the credit system, and oversee commercial banks. In South Africa, it is the South African Reserve Bank.
Minimise The Risk Of Bad Decisions
It is important to trade in a managed trading environment. Make sure that you work with a regulated broker who is familiar with the regulations and who will help you make informed decisions. Make sure your broker is affiliated with the governing body here in South Africa called the Financial Sector Conduct Authority (FSCA). A regulated forex broker (in SA) must comply with the regulations set out by the FSCA, provide grievance rectification processes, meet professional indemnity insurance requirements as well as capital requirements, and have an office in SA with a local director who also lives in SA.
