By Brian Perry
The currency markets are the largest and most actively traded financial markets in the world with a daily trading volume of more than $3 trillion (Triennial Central Bank Survey 2007). The majority of this trading is concentrated in the world's major financial centers such as London, New York and Tokyo. Large institutional investors such as banks, multinational corporations, hedge funds and central banks constitute the majority of the market activity. To knowledgeably compete in this overwhelmingly institutional marketplace, individual investors need to assimilate as much information as possible. This tutorial provides an overview of basic foreign currency (forex/FX) trading strategies, the markets for those strategies, and an examination of some of the most popular currencies traded.
Each transaction in the currency market involves two different trades: the sale of one currency and the purchase of another. The two currencies involved in the trade are known as a pair. While it is possible to swap virtually any currency for another, the majority of trading occurs among a handful of popular currency pairs.
|Figure 1: The most heavily traded currencies and their market share|
|Source: BIS Triennial Survey, 2004|
The chart shows the most heavily traded currencies and their market share. Total market share adds up to 200% because each transaction involves two currencies (ECB: BIS Triennial Survey 2004).
As the world's reserve currency, the U.S. dollar is the most actively traded currency, and pairs involving the dollar make up the majority of transactions. Therefore, this tutorial examines the trading relationships between the U.S. dollar and several of its chief counterparts, including the euro, the Japanese yen, the British pound, and the Swiss franc. The tutorial also examines other popular trading pairs involving the U.S. dollar and the commodity currencies – those of Canada, Australia, and New Zealand.
Although the average trader will likely participate only in trades involving the U.S. dollar, this tutorial includes a discussion of cross rate pairs – pairs of significant international currencies that are not the U.S. dollar. Additionally, because emerging markets form an important part of the global financial system, this tutorial also examines the unique challenges facing individuals interested in trading emerging market currencies.(For more information, read The Foreign Exchange Interbank Market.)
Before the discussion of popular trading pairs, a brief analysis describes some of the instruments, concepts and strategies that should be familiar to investors trading in the currency markets.Forex Currencies: Trading Strategies
TradingEvery day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
TradingThe forex market has a lot of unique attributes that may come as a surprise for new traders.
TradingEvery currency has specific features that affect its underlying value and price movements in the forex market.
TradingThe value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
TradingLearn about the forex market and some beginner trading strategies to get started.
TradingCurrency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
InvestingThe foreign currency market is the largest financial market in the world, and investors in this market have many options.
InvestingThere's always a bull market somewhere - and now you can find it with currency ETFs.
InvestingCentral banks and financial institutions hold large amounts of foreign money as their reserve currency.