This article, which tries to illustrate in a very simple way the whole definition of Forex, what the Forex market is, and how it works, would be incomplete without reviewing the most popular assets available to any Forex Trader.
The most popular currency pairs in the world are – US Dollar, Euro, British Pound, Japanese Yen, and Swiss Franc; they are part of the group of major currency pairs: EUR/USD, GBP/USD, USD/JPY, and USD/CHF.
Three other currencies are also very common: the New Zealand Dollar, the Canadian Dollar, and the Australian Dollar. If they are associated with the US Dollar, we get the group of minor currencies: NZD/USD, USD/CAD, and AUD/USD. All other currency pairs in Forex trading are commonly referred to as “exotic currency pairs” and represent less than 10% of all Forex transactions. The best way to explore all existing pairs in the Forex Market is through a Trading Platforms such as Zulu Trade for example.
Who Does Forex Trade?
The most important players in the Forex market are:
- The Central Banks
- The government’s
- Other Banks
- The Hedge Funds
- Investment Funds
- The Brokers
- Professional and Private Investors
Central Banks, such as the European Central Bank, have the most weight in forming currency prices among currency market participants. A central bank is, in fact, the money supplier for the country or area where it operates, and, therefore, it is the existing offer in that market.
Central bank decisions have a very important impact on the price of currency pairs, so any novice trader needs to be aware of the economic calendar! To learn more about using the economic calendar, see our dedicated article – How to Use the Forex Economic Calendar.
Small investors, like individual traders, have very little influence on the market, but that influence is felt by their large numbers. To better understand the behavior of the Forex Market, we should know that the supply and demand for currencies are constantly evolving, and we traders can follow the movement of currency prices through a price chart.
How Forex Trading Works
In economics, the law of supply and demand is a simple system that explains price formation in a free competitive market. The same principle applies to the Forex market. Whenever a currency is bought, greater demand is generated in the market, ultimately pushing the currency’s price higher.
Likewise, each time a currency is sold, there is an increase in supply, which causes a drop in the price of a given currency. The impact each buy and sell has on the market is directly proportional to the trading volume of each operation.
The equilibrium price philosophy is the key to understanding how online Forex trading works, as all economic events worldwide impact the market.