With foreign currency trading no longer reserved just for banks, financial institutions, and multinational corporations, due to technological advances, the foreign exchange market (FX or forex) has transformed into a 24-hour market open for any investor or trader.
Currency Trading Options
There are approximately 180 legal currencies to trade in the foreign exchange market, but over 95% of all trading in the foreign market occurs under the following currencies:
As the most used currency in international transactions, the U.S. dollar (USD) serves as one of the world’s reserve currencies. It’s also used as the standard unit of currency in various commodity markets including precious metals and energy.
With the euro (EUR) being the official currency of 19 of the 28 countries of the European Union, it is the second most traded currency in the Forex market after the US dollar. The European Central Bank manages the currency which is also the second most widely held foreign exchange reserve by central banks.
Also known as the pound, the pound sterling (GBP) is the official currency of the United Kingdom and it has one of the highest rates in the world. As the oldest existing currency and, the pound is the fourth-most-traded currency in the foreign exchange market.
The yen (JPY) serves as the official currency of Japan and is the third most traded currency in the Forex market. As the third most traded currency in the foreign exchange market, it is also a highly used reserve currency behind only the U.S. dollar, the euro, and pound sterling.
As the official currency of Canada, the Canadian dollar (CAD) is the seventh-most traded currency on the Forex market and the fifth most held reserve currency in the world. Also referred to as the ‘loonie’ by foreign exchange traders, the Canadian dollar accounts for approximately 2% of all global reserves.
The Aussie dollar (AUD) acts as the official currency of Australia and is the 5th most traded currency in the Forex market. The Aussie dollar is also known as a commodity currency because of its extensive raw material exports, which causes its rate to fluctuate based on China and other Asian import markets.
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By using information technology platforms between global banks to conduct foreign currency trading, the foreign exchange market (FX or forex) is a decentralized global market where all the world’s currency trading is conducted over a variety of platforms and exchanges.
The advent of internet trading software has propelled the industry to allow instantly tradeable currency which has caused the number of daily transaction volumes to increase dramatically. This has led the Forex market to be extremely liquid and more stable.
As the largest trade market in the world, trading on the foreign exchange market occurs the European, Asian and United States trading sessions. While overlap does occur between the three sessions, the majority of each currency that is traded occurs during their session.
An exchange rate is based on the value of a country’s currency in relation to another country’s currency. With currency rates determined by how much demand there is against the supply of a currency, the increase or decrease of a country’s currency can fluctuate based on interest rates, unemployment numbers, inflation, gross domestic product output, manufacturing date, and commodities.