Foreign exchange (Forex) trading is one of the largest and most liquid financial markets in the world, with a daily trading volume exceeding $7.5 trillion, according to a report by the Bank for International Settlements (BIS) in 2023. Unlike stock markets, where individual companies' shares are traded, Forex involves the trading of currencies. This article provides an in-depth overview of what is traded in Forex, with detailed insights into the various currency pairs, their classifications, and the significance of these instruments in the global market.
Introduction: Understanding Forex Trading
Forex trading is the process of buying one currency while simultaneously selling another. Currencies are traded in pairs, and the price of one currency relative to the other is known as the exchange rate. Traders speculate on changes in exchange rates to make a profit. The Forex market operates 24 hours a day, five days a week, and is driven by factors such as economic reports, geopolitical events, and market sentiment.
Currencies are the main asset class in Forex trading, but they are traded in different formats and categories. The purpose of this article is to explore the assets that traders buy and sell in the Forex market, while providing real-world data and industry trends.
Major Currency Pairs
The most widely traded assets in the Forex market are major currency pairs, which involve the world’s most liquid currencies, including the US dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP), and others. The following are some of the most traded major currency pairs:
EUR/USD (Euro/US Dollar): As the most traded currency pair globally, EUR/USD accounts for approximately 30% of daily Forex trading volume. The euro and US dollar represent the two largest economies in the world—the Eurozone and the United States. This pair is heavily influenced by economic data such as GDP growth, employment figures, and interest rates.
USD/JPY (US Dollar/Japanese Yen): This is another popular currency pair, representing the United States and Japan, the third-largest economy globally. The USD/JPY is influenced by US and Japanese monetary policy, inflation rates, and trade balances. It accounts for around 13% of global Forex trading.
GBP/USD (British Pound/US Dollar): Commonly known as “Cable,” the GBP/USD pair is influenced by political events like Brexit and the Bank of England's monetary policies. The United Kingdom’s strong financial sector also plays a crucial role in its valuation.
USD/CHF (US Dollar/Swiss Franc): This pair is referred to as the “Swissie” and is often seen as a safe haven for investors due to Switzerland's political neutrality and economic stability. During times of financial uncertainty, traders often flock to this pair for lower volatility.
These major currency pairs account for the majority of trading volume in Forex and are highly liquid, meaning traders can enter and exit positions quickly without significant price slippage.
Minor Currency Pairs
Minor currency pairs, also known as cross-currency pairs, do not include the US dollar but involve other major currencies. Examples of minor pairs include:
EUR/GBP (Euro/British Pound): This pair represents the economic relationship between the Eurozone and the United Kingdom. As two of Europe’s largest economies, movements in this pair are driven by political events, trade agreements, and central bank policies.
EUR/AUD (Euro/Australian Dollar): Reflecting the trade relationships between Europe and Australia, this pair is influenced by commodity prices, particularly in Australia, which is a significant exporter of raw materials like iron ore and coal.
GBP/JPY (British Pound/Japanese Yen): This currency pair is favored by traders seeking higher volatility due to the differences in economic structure and interest rates between the UK and Japan.
Although minor pairs are less liquid than major pairs, they can still offer significant trading opportunities, particularly during periods of regional economic events or shifts in market sentiment.
Exotic Currency Pairs
Exotic currency pairs consist of a major currency paired with a currency from a smaller or emerging economy. Examples include:
USD/TRY (US Dollar/Turkish Lira): This pair combines the US dollar with the Turkish lira, a currency that has experienced significant volatility due to Turkey’s economic instability, inflation, and political challenges.
EUR/ZAR (Euro/South African Rand): The South African rand is a highly volatile currency due to factors such as commodity prices, political uncertainty, and South Africa’s economic policies. It offers traders the potential for large profits but also carries higher risks.
Exotic pairs are generally more volatile and less liquid compared to major and minor pairs, which can lead to wider spreads and higher trading costs. These pairs are typically favored by experienced traders who are comfortable managing higher risks.
Commodities and Their Role in Forex
Although commodities are not directly traded in the Forex market, they play a significant role in influencing currency movements. Many currencies are closely linked to the export of key commodities. For example:
AUD/USD and Commodities: The Australian dollar (AUD) is often referred to as a "commodity currency" because Australia is a major exporter of natural resources like iron ore, coal, and gold. A rise in commodity prices typically strengthens the AUD, while a decline weakens it.
USD/CAD and Oil: The Canadian dollar (CAD) is closely tied to oil prices, as Canada is one of the largest oil exporters in the world. When oil prices rise, the Canadian dollar often strengthens against the US dollar, and vice versa.
Traders often watch commodity price movements closely when trading certain currency pairs, as shifts in commodity prices can have a significant impact on the Forex market.
Trends in Forex Trading: The Shift Toward Algorithmic Trading
The Forex market has seen a significant shift toward algorithmic trading in recent years, with more traders relying on automated systems to execute trades based on pre-programmed criteria. According to a report by JPMorgan in 2022, over 70% of Forex trading volume is now driven by algorithms, up from 50% in 2016. These algorithms can quickly analyze large amounts of data, execute trades with precision, and manage risk more effectively than manual traders.
Algorithmic trading has contributed to tighter spreads, faster execution times, and increased liquidity, particularly in major currency pairs. However, it has also introduced new challenges, such as flash crashes, where sudden market movements occur due to algorithmic misfires.
Conclusion: The Diverse Instruments Traded in Forex
Forex trading involves a wide range of instruments, from major currency pairs like EUR/USD and USD/JPY to more volatile exotic pairs such as USD/TRY and EUR/ZAR. Each type of pair offers different risk and reward profiles, depending on factors such as liquidity, volatility, and market sentiment.
For both novice and experienced traders, understanding what is traded in Forex is crucial for developing a successful trading strategy. Whether trading the highly liquid majors or venturing into the more volatile exotics, traders can use tools like Forex trading calculators and market analysis to make informed decisions.
