Foreign Exchange, or Forex Trading as it is more commonly referred to, involves the conversion of one currency into another. The Forex Market is one of the largest, most volatile, and actively traded markets in the world.
There is trading volume of around $5 trillion which is traded daily according to Forexsuggest.com, and more traders are flocking to the Forex Market for an opportunity of making great gains and profits from the market’s volatile and subsequent liquid nature.
In a Forex pair, the base currency is the first currency which is listed while the second currency is known as the quote currency. The basic principle behind Forex trading is to sell one currency to buy another, and therefore Forex is quoted in pairs.
The Forex market consists of currencies from all over the world resulting in difficult exchange rate predictions due to various factors which could contribute to price movements.
The Forex Market, like other financial markets, is predominantly driven by forces of supply and demand, and the factors involved with price movements include:
- Central banks
- News Reports
- Market sentiment, and
- Economic circumstances and situations.
The Forex market is the largest financial market due to the trading volumes and this makes it the most volatile market as well. Forex volatility involves the measure of overall price fluctuations over a certain time.
This is in addition to how rapidly the prices in the market change that in the Forex Market and it is only a standard deviation of returns.
Forex pairs are divided into Majors, Minors, and Exotic pairs. Major pairs include currencies which are traded the most while minors are Forex pairs which do not include USD on either side.
Exotic Forex pairs are those that comprise of a bigger, stronger currency with a smaller currency of a developing country. These pairs often have wider spreads than Major and Minor Forex pairs.
The Major Forex pairs are those who are traded the most globally. These pairs are known for their liquidity along with tighter and lower spreads.
The EUR/USD Forex pair may be the most traded currency pair in the Forex, but it is not the most volatile. Some of the most volatile Forex pairs include:
The AUD/USD pair has been substantially volatile due to developments in the US Market. Along with numerous economic factors which have been driving factors behind price movements, this has resulted in mixed US economic data and allowed for a stronger AUD.
It is important for traders to stay up to date with volatile currency pairs as they are affected by various factors. These factors tend to drive currencies from a country in either upward or downward directions against other currencies.
Knowing the volatility of a pair may be to the advantage of numerous traders who depend on market volatility to make great gains and profits. Subsequently it may also help other traders who do not trade according to market volatility in preventing substantial losses.