The Forex (Foreign Exchange Market) exists because multi-national corporations and nations need to buy and sell goods/services from outside sources. To do that, they need to exchange their home currency with that of other nations. As you know, not all currencies have the same buying power so nations, banks, and corporations exchange their money with one another just as tourists do when traveling abroad same concept, just a LOT bigger scale!
In fact, the Forex is the single largest financial market in the world and upwards of 1.8 trillion dollars are traded every day between the hours of 5 p.m. EST Sunday thru 4 p.m. EST Friday. Between those hours, the Forex market is open and there are always brokers out there willing to buy and sell positions. However, unlike the NYSE, there is no centralized exchange but rather an informal network of computers supplied by investment houses, central banks, and other large players which help facilitate the trades.
The Forex market actually trades dozens of different currency pairs. The base currency is the first in the pair and was used to set up the trading account. The counter currency is the second in the pair and is sometimes referred to as the terms currency. A typical lot is $100,000 and an investor might be interested in the currency pair USD/CAN for instance. That means that the investor would buy $100,000 worth of Canadian dollars with the base currency (USD) at the current exchange rate in order to open a position.
While there are literally dozens of different currencies exchanged on the Forex, investors are advised to concentrate only on currencies that trade with the USD. The USD backs nearly 90% of all trades on the Forex and it is one of 8 main players in the market, including:
– U.S. Dollar (USD)
– British Pound Sterling (GBP)
– Euro (EUR)
– Canada Dollar (CAN)
– Australian Dollar (AUD)
– Swiss Franc (CHF)
– New Zealand Dollar (NZD)
– Japanese Yen (JPY)
By sheer volume alone, the USD/EUR and USD/GBP are the two most popular currency pairs on the Forex based upon volume. However, this does not necessarily mean that they are always the best investment options at any given time. The currency pairs with the greatest pip movement are also the most volatile and risky. The trick for any investor is to identify the currency pair that has the greatest potential for pip movement with the least volatility. Only analysis of technical data can provide that information but there are brokers out there offering this information as part of their service package so it is a very good idea to see what is offered before signing up with any specific broker.
Again, the most popular currencies are not always going to be the most profitable so be sure to analyze a lot of charts and track price movements between different pairs over the same period of time to help find the best pair for you which will provide the greatest profit potential and the least volatility.