In keeping up with its clarity principle, the international broker Octa clarifies one aspect of trading at a time. Learn everything you need to know about currency trading, simply and transparently.

KUALA LUMPUR, MALAYSIA - Media OutReach - 17 November 2023 - In the world of finance, there are many trading markets and assets, each with its own unique features. Today, we will explore the Forex market and how one can profit from trading currencies. Whether you are a seasoned trader or a novice stepping into the world of currency trading, understanding the intricacies of the Forex market is pivotal to navigating its waters successfully and reaping financial rewards. Currency market (Forex) definition The foreign exchange market is a decentralised or 'over-the-counter' (OTC) market that establishes the exchange rate for currencies worldwide. It is the world's largest financial market, consisting of a worldwide network of financial centres operating 24 hours a day, pausing only on weekends. The diverse variety of currency pairs, coupled with the market's inherent volatility, offer numerous possibilities for traders to earn profits by speculating on the fluctuations in currency values. Trading volumes The Forex market is known for its massive liquidity, being the largest financial market globally. According to the 2022 BIS quarterly review, trading volumes in this market often exceed $7.5 trillion per day, allowing for constant buying and selling of currencies. Market participants Various participants populate the Forex landscape, each with unique roles and objectives.

• Retail traders. Individuals trade currencies aiming to profit from currency price fluctuations. They typically use online brokerage platforms to execute trading orders.

• Banks and financial institutions. They form the backbone of the Forex market, providing liquidity and facilitating interbank trading. Major banks help determine the exchange rates through their currency conversion operations.

• Corporations. Multinational companies participate in the Forex market to hedge currency risk and manage currency conversion for international trade transactions.

• Central banks and governments. They intervene in the Forex market to stabilise or increase the value of their national currencies and control inflation, often influencing currency values significantly.

• Hedge funds and investment firms. These entities trade currencies as a part of their investment strategies, often managing large portfolios and employing complex trading techniques.

Forex trading contracts Forex traders utilise several instruments to manoeuvre through the market effectively:

• Spot contracts. The most straightforward and prevalent method where currencies are traded for immediate delivery. It is precisely here that retail traders mainly operate. However, retail traders can also use information about operations derived from the derivatives market for making trading decisions.
• Contracts for differences (CFD). A CFD is a contract between a trader and a broker to exchange the difference in value of an underlying asset, like a currency pair, from the time the contract is opened to when it is closed. CFDs offer traders high leverage, diverse global market access from one platform, flexibility to capitalise on both rising and falling markets and the ability to trade fractional positions.
• Derivatives contracts.
• Futures. Standardised contracts to buy or sell a specific currency at a future date.
• Options. Contracts granting the right, but not the obligation, to buy or sell a currency at a predetermined price.
• Swaps. Agreements to exchange currency pairs between two parties at a specific time, based on the agreed-upon rate.

Major and minor currency pairs In the Forex market, currency pairs are categorised into majors and minors. Major currency pairs:

• EUR/USD (Euro/U.S. Dollar)
• USD/JPY (U.S. Dollar/Japanese Yen)
• GBP/USD (British Pound/U.S. Dollar)
• USD/CHF (U.S. Dollar/Swiss Franc)
• AUD/USD (Australian Dollar/U.S. Dollar)
• USD/CAD (U.S. Dollar/Canadian Dollar)
• NZD/USD (New Zealand Dollar/U.S. Dollar).

These major pairs are the most traded globally, characterised by high liquidity and lower spreads due to the involvement of the U.S. Dollar. They constitute a significant market share in the Forex market, and beginners often prefer them. Conversely, minor currency pairs, also known as cross-currency pairs, do not involve the U.S. Dollar. Examples of minor pairs include EUR/GBP (Euro/British Pound), EUR/AUD (Euro/Australian Dollar), and GBP/JPY (British Pound/Japanese Yen). Minors can offer diverse trading opportunities and allow for trading diversification, but they often come with lower liquidity and higher spreads compared to majors. Traders typically explore minor pairs as they accrue more experience and pursue varying currency values and volatility levels. The choice...