What is forex trading?
Forex trading is the means through which one currency is changed into another. When trading forex, you are always trading a currency pair – selling one currency while simultaneously buying another.
Each currency in the pair is listed as a three-letter code, which tends to be formed of two letters that stand for the region, and one standing for the currency itself. For example, USD stands for the US dollar and JPY for the Japanese yen. In the USD/JPY pair, you are buying the US dollar by selling the Japanese yen.
Some of the most frequently traded FX pairs are the euro versus the US dollar (EUR/USD), the British pound against the euro (GBP/EUR), and the British pound versus the US dollar (GBP/USD).
To keep things ordered, most providers split pairs into the following categories
- Major pairs - seven currencies that makeup 80% of global forex trading. Includes EUR/USD, USD/JPY, GBP/USD and USD/CHF
- Minor pairs - less frequently traded, these often feature major currencies against each other instead of the US dollar. Includes: EUR/GBP, EUR/CHF, GBP/JPY
- Exotics pairs- a major currency against one from a small or emerging economy. Includes: USD/PLN, GBP/MXN, EUR/CZK
- Regional pairs - pairs classified by region – such as Scandinavia or Australasia. Includes: EUR/NOK, AUD/NZD, AUD/SGD
Most forex transactions are carried out by banks or individuals by seeking to buy a currency that will increase in value against the currency they sell. However, if you have ever converted one currency into another, for example, when traveling, you have made a forex transaction.