What Actually do you BUY or SELL in the forex market?
Have you ever been trading forex? Do BUY or SELL a quotation pair provided forex broker? Of course, when you do buy or sell in the forex market, there is no physical currency exchange. All trades are only registered on the computer. For dollar-denominated trading accounts, all profits or losses are calculated in dollars traded on a trader’s account.
Actually the main reason for the emergence of the forex market is to facilitate the exchange of one currency to another currency for multinational corporations that need to trade on a continuous currency (eg for salaries, payments on goods and services from foreign vendors, maturity payments and merger activities and acquisitions). However, everyday corporate needs consist of only about 20% of the volume of the forex market. Moreover, 80% of trading in the forex market is speculative, conducted by large financial institutions, hedge funds worth billions of dollars and even individuals (retail traders).
Since currencies are always traded in pairs, when you trade, you always buy one currency and sell other currencies. For example, if you sell one lot (equivalent to 100,000 units) of EUR / USD, you will basically exchange the euro with dollars and now it will sell euro and buy dollars. To better understand this dynamic, let’s use a concrete example. If you go to an electronics store and buy a $ 1,000 computer, what would you do? You will exchange your money for the computer. You basically sell $ 1,000 and buy one computer. The store will buy $ 1,000 and sell one computer in its inventory records. The same principle applies to the Forex market, except that there is no physical exchange. While all transactions are just computer records, the consequences are no less real.
What currencies are traded on the forex market?
Although some forex brokers trade in exotic currencies like Thai baht, the majority of brokers provide the seven most liquid currency pairs in the world. That is four major currency pairs:
EUR / USD (euro / dollar)
USD / JPY (dollar / Japanese yen)
GBP / USD (British pound / dollar)
USD / CHF (dollar / Swiss franc)
And three pairs of commodity currency:
AUD / USD (Australian dollar / dollar)
USD / CAD (Canadian dollar / dollar)
NZD / USD (New Zealand dollar / dollar)
These currency pairs, along with various cross currency combinations (such as EUR / JPY, GBP / JPY and EUR / GBP), account for more than 95% of all speculative trading in the forex market. Given the number of trading instruments, only 18 pairs and cross are actively traded. The forex market is much more concentrated than the stock market.