A:

The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is done on a group of currencies called the "majors", which include the U.S. dollar, the euro, the British pound, the Japanese yen and the Canadian dollar.

Currencies are traded against one another and are subsequently quoted in pairs. An example of a currency pair is the EUR/USD, which is one of the most widely traded currency pairs. Because the U.S. dollar is one of the most traded currencies, it is included in the majority of the pairs that are traded. However, other widely traded pairs that do not include the U.S. dollar, such as the GBP/JPY currency pair, are called cross currencies.

Most American forex investors will deposit U.S. dollars into their margin accounts. However, just because they have U.S. dollars doesn't mean that they are limited to trading currency pairs that include the U.S. dollar. American investors are still able to trade on cross currencies, they just have to make two trades instead of one.

For example, assume that an investor with an account denominated in U.S. dollars wants to buy the Japanese yen against the British pound. To do this, he or she would have to trade the GBP/JPY currency pair by purchasing British pounds with U.S. dollars. Once this trade is complete, the investor can then use the British pound to complete the trade on the GBP/JPY currency pair. Because two trades need to be completed, the broker calculates a margin for both trades and adds them together. To avoid having to do this, brokers will often accept margin deposits in foreign currencies such as the British pound. Usually investors who have currency available in foreign bank accounts are able to use this option.

To learn more, see A Primer On The Forex Market, Getting Started in Forex and Wading Into The Currency Market.

RELATED FAQS
  1. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  2. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  3. What happens to the US dollar during a trade deficit?

    During a trade deficit, the U.S. dollar generally weakens. Of course, there are numerous inputs that determine currency movements ... Read Full Answer >>
  4. Will technology ever disrupt the role of the custodian bank?

    Custodian banks, along with other financial institutions that hold custodian accounts, are likely to be disrupted but not ... Read Full Answer >>
  5. How do I close a long position in forex?

    Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>
  6. Where did the term 'pip' in currency exchange come from?

    The term pip is an acronym for percentage in point or price interest point. It measures a unit of change within a pair of ... Read Full Answer >>
Related Articles
  1. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  2. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  3. Forex Fundamentals

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  4. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  5. Stock Analysis

    3 Predictions for U.S. Stocks in 2016

    Read about predictions for the stock market in 2016. See how the energy sector and the biotech sector may be under pressure in the new year.
  6. Forex

    How 2016 Could Be A Disaster for These Currencies

    Tanking oil prices, slowing BRIC growth, and general instability do not bode well for these currencies.
  7. Term

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  8. Mutual Funds & ETFs

    3 ETF Strategies for Growth in Europe for 2016 (FXEU, DFE)

    Learn about the outlook for European economies and how European equities could be poised for a more prosperous 2016 than U.S. equities.
  9. Forex Strategies

    How To Build A Forex Trading Model

    The forex market is volatile, but a forex trading model with clear, step-by-step rules based on a sound strategy can help decrease losing trades.
  10. Forex Fundamentals

    Explaining Slippage

    Slippage occurs when a trade is executed at a different price than what was expected.
RELATED TERMS
  1. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  2. Currency

    Currency is a generally accepted form of money, including coins ...
  3. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the ...
  5. ICE LIBOR

    See LIBOR
  6. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center