Have you ever been to a trip abroad? If yes, you will know that it is absolutely essential that we carry the currency of the country that we are visiting, so that we can make all necessary purchases easily. Where do we get the currency of other countries? One such source is the forex market.

The word, “forex” comes from the combination of the words, “foreign” and “exchange”. The foreign exchange is an international market which facilitates the process of changing one currency to another.

People usually get their currencies converted for two main purposes – either tourism, or trade. Since trade and tourism are globally widespread, the forex market is one of the most liquid markets worldwide.

In fact, it is so liquid, that the market has reached an average global turnover of $5 trillion per day.

Let us now discuss the basics features of this market.

We know that shares and derivatives are traded in centralized marketplaces, but it is interesting to know that there is no such marketplace for currencies. All over the world, currencies are traded via computer platforms. This market system is known as an Over-The-Counter (OTC) system.

Currencies are traded in any denomination on the OTC, but are trade din lot sizes on the futures platform. For each currency transaction, there are always two currencies involved. These currencies are termed together as a currency pair. The pair is written as two currencies next to each other as the base currency, and the quote currency.

Each pair has 2 types of prices associated with it – the bid price and the ask price. The bid price is the one which the dealer wants to pay for the currency, whereas the ask price is the one at which a dealer will sell the same currency. The difference between these two is known as the spread of the pair.

There are predefined pairs in the market, and only these can be traded in the market. There are three types of currency pairs – major, minor and exotic pairs.

Major pairs are all the pairs which have the US dollar or the USD as a component. Minor pairs are those which don’t include the USD. They are also known as cross pairs. Lastly, an exotic currency pair is the one between a major currency and the currency of a developing economy. Examples of this type include the EUR/TRY, which is the Euro and the Turkish Lira.

Forex market is a highly liquid market with great volume which gives the trader an opportunity to benefit from forex trading after the understanding the pros and cons of the forex market

Thank you for watching.