Buying and selling foreign exchange (forex) is a fascinating topic. It includes knowing what to buy and sell and when to buy and sell it. Finally, knowing how much buying and selling there is in the forex market helps to put everything in perspective.
Key Takeaways
- Trading can be performed in nearly all currencies in the foreign exchange market, but a few currencies known as the majors are used most often.
- Traders can always take either side of a trade in the forex market.
- Traders profit by betting that a currency's value will appreciate or depreciate against another currency.
- The average daily trading volume in the forex market was over $7.5 trillion in 2022.
Which Currencies Can Investors Buy and Sell?
Trading can be done in nearly all currencies. However, a few currencies known as the majors are used in most trades. These currencies include the U.S. dollar, the euro, the British pound, the Japanese yen and the Swiss franc. All currencies are quoted in currency pairs. When a trade is made in forex, it has two sides—someone is buying one currency in the pair, while another individual is selling the other. The major pairs in currency trading are EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
The U.S. dollar is often also paired with the Canadian dollar, the Australian dollar, or the New Zealand dollar, as part of what is known as the commodity pairs, meaning pairings of currencies in economies that are particularly sensitive to changes in commodity prices.
It should also be noted that not all pairs are available at most forex brokers, but many currencies trade against the U.S. dollar. For example, investors can trade the U.S. dollar with the Mexican peso or the Thai baht. However, direct trades between the peso and the baht are far less common. An exotic currency, such as the Thai baht, typically only trades against the U.S. dollar at most forex brokers.
Can You Sell in Forex Without Buying?
It is always possible to take either side of a trade in the forex market. Living in the United States and beginning with U.S. dollars does not limit a trader to betting against the dollar with other currencies.
Much like short selling stocks, an investor can borrow foreign currency and use the money to buy U.S. dollars. If the foreign currency declines, the U.S. trader can pay back the loan with fewer U.S. dollars and make a profit. That sounds complex, but actually trading a currency pair works similarly to buying and selling any other investment.
It is also possible to borrow one foreign currency and buy another foreign currency. For example, a U.S. trader can borrow Japanese yen and use the funds to buy Australian dollars.
When to Buy and Sell
Traders look to make a profit by betting that a currency's value will either appreciate or depreciate against another currency. For example, assume that you purchase U.S. dollars and sell euros. In this case, you are betting that the value of the dollar will increase against the euro. If your bet is correct and the value of the dollar increases, you will make a profit.
Trading forex is all about making money on winning bets and cutting losses when the market goes the other way. Profits (and losses) can be increased by using leverage in the forex market.
New forex traders should first attempt to make profits and only use leverage after learning how to profit consistently.
How Much Buying and Selling Is There in the Forex Market?
The forex market is the largest market in the world. According to the 2022 Triennial Central Bank Survey conducted by the Bank for International Settlements, which is its most recent survey, the average daily trading volume was $7.5 trillion.
Huge trading volume provides the forex market with excellent liquidity. This liquidity benefits frequent traders by reducing transaction costs. All trading is over-the-counter, which allows trades to be made 24 hours a day during weekdays.
What Is the Most-Traded Currency?
The U.S. dollar is the most heavily-traded currency by far. It is in a currency pair with all the other major currencies. It is also seen as theunofficial globalreserve currency, as it is held by most central banks and other institutional investment entities around the world. In second place is the euro, followed by the Japanese yen.
What Is the Most-Traded Currency Pair?
The euro and the US dollar, listed as EUR/USD, is the most heavily-traded currency pair in the world, due to its large daily volume. This pairing represents more than 20% of all forex transactions.
How Do You Get Started Trading Forex?
The process of getting started in forex trading is comparable to getting started in any kind of investing. Becoming educated about forex trading, including the currency markets and trading process, is crucial. You may want to trade in a demo account before putting up actual money. When you're ready to move forward, you'll need to research forex brokers and make a choice. When you've found one that meets your needs, you will need to open and fund a trading account. Finally, you can begin trading.
The Bottom Line
Investors looking to buy and sell in the forex market have access to a broad, liquid market that encompasses a number of major currencies and is available to trade in 24/7 on weekdays. The most commonly-traded currency is the U.S. dollar and the most commonly-traded pairing is the U.S. dollar and the euro, which constitutes 20% of all forex trading. But a variety of other currencies and currency pairings are also available.
