Trading in the foreign exchange (forex) markets is in many ways similar to trading any other asset class, with one major distinction - buying and selling in forex always involves two instruments. Understanding the mechanics of buying and selling in forex, the types of trades permitted, and the available instruments are essential for success.
Key Takeaways
- Forex trading can be performed in nearly all currencies, but a few currencies known as the ‘majors’ are used most often.
- Traders can take either side of a trade in the forex market.
- Traders profit by betting that a currency's value will appreciate or depreciate against another currency.
- The average daily trading volume in the forex market was over $7.5 trillion in 2022.
Which Currencies Can Investors Buy and Sell?
Trading can be done in nearly all currencies, but a select few popular currencies make up the majority of trades. These include the U.S. dollar, the euro, the British pound, the Japanese yen and the Swiss franc.
All currencies are quoted in currency pairs. A trade in forex has two sides—someone is buying one currency in the pair, while someone else is selling the other. The major pairs in currency trading are EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
The U.S. dollar can also be paired with the Canadian dollar, the Australian dollar, or the New Zealand dollar, as part of commodity pairs, meaning pairings of currencies in economies that are particularly sensitive to changes in commodity prices.
Not all pairs are available at most forex brokers, but many individual currencies trade against the U.S. dollar. For example, investors can trade the U.S. dollar with the Mexican peso or the Thai baht. However, direct trades between the peso and the baht is far less common. An exotic currency, such as the Thai baht, typically only trades against the U.S. dollar at most forex brokers.
Can You Bet on the Downside in Forex?
In the forex market, you can take either side of a trade. A U.S. trader with a USD account can bet both on the dollar or against it. Much like short selling stocks, an investor can borrow foreign currency and use the money to buy U.S. dollars. If the foreign currency declines, the U.S. trader can pay back the loan with fewer U.S. dollars and make a profit.
It is also possible to borrow one foreign currency and buy another foreign currency. For example, a U.S. trader can borrow Japanese yen and use the funds to buy Australian dollars. While this may sound complicated, actual trading of a currency pair works similarly to buying and selling any other investment.
How to Make a Profit in Forex
Forex traders bet that one currency's value will appreciate or depreciate against another currency. For example, assume that you purchase U.S. dollars and sell euros. In this case, you are betting that the value of the dollar will increase against the euro.
If your bet is correct and the value of the dollar increases, you will make a profit. Trading forex is all about making money on winning bets and cutting losses when the market goes the other way. Profits (and losses) can be increased by using leverage in the forex market.
To make money in the forex market, you have to make the most of your winning bets and cut losses quickly if the market goes the other way. Profits (and losses) can be increased by using leverage in the forex market.
New forex traders should be careful with leverage until they learn how to profit consistently.
How Much Buying and Selling Is There in the Forex Market?
The forex market is the largest investment market in the world. As of 2022, its average daily trading volume stood at $7.5 trillion. Such large volumes make the forex market very liquid. The liquidity benefits frequent traders by reducing transaction costs, offering tighter spreads, reducing slippage, and allowing for easy entries and exits regardless of trade size. All forex trading happens over-the-counter, which allows trades to be made 24 hours a day during weekdays.
What Is the Most-Traded Currency?
The U.S. dollar is by far the most heavily traded currency. It is paired with all the other major currencies and is widely regarded as the global reserve currency, held by most central banks and institutional investment entities around the world. In second place is the euro (EUR), followed by the Japanese yen (JPY).
What Is the Most-Traded Currency Pair?
The euro and the U.S. dollar pair, listed as EUR/USD, is the most heavily traded currency pair in the world. As of April 2022, its share of daily forex trades stood at nearly 23%.
How Do You Get Started Trading Forex?
Getting started in forex trading is comparable to getting started in any kind of investing. Becoming educated about all aspects of the currency trading process is crucial. You may want to trade in a demo account until you get comfortable enough to put up actual money. When you're ready to move forward, you'll need to research forex brokers. Once you've found one that meets your needs, you will need to open and fund a trading account. Finally, you can begin trading.
The Bottom Line
Buying and selling currencies has many similarities to trading any other asset class. You can trade with an online broker, bet on both upside and downside price movement, and have many trading instruments to choose from, some being far more liquid than others. The forex market also boasts unparalleled liquidity, and is open for trading 24 hours a day, five days a week (from Sunday, 5 p.m. until Friday, 4 p.m. ET), making it the market of choice for many traders.
