The Foreign Exchange Market (Forex or FX) is the world’s largest financial market, where currencies are bought and sold. It is a decentralized, over-the-counter (OTC) global market, operating 24 hours a day, 5 days a week across major financial centers worldwide.
The Forex market supports global trade, investment, banking, and international business by enabling currency conversion and hedging against exchange-rate fluctuations.
1. How the Forex Market Works
Forex trading occurs electronically through global networks of banks, financial institutions, brokerages, and liquidity providers.
Trading takes place in three main market segments:
a. Spot Market
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Direct exchange of currencies at the current market price
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Settlement usually within T+2 days (or same-day for some currencies)
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Widely used for real-time trading
b. Forward Market
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Contract to exchange currencies at a future date
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Price is fixed today
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Used for hedging by corporations and institutions
c. Futures Market
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Similar to forwards but traded on centralized exchanges
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Standardized contract size and expiration
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Less commonly used than spot forex
2. Types of Forex Pairs
Forex pairs are categorized based on global demand, economic importance, and liquidity. The three main categories are:
A. Major Currency Pairs
These are the most frequently traded pairs in the world. They all include the U.S. Dollar (USD) and are known for high liquidity and tight spreads.
Most Common Major Pairs
| Pair | Name | Example Description |
|---|---|---|
| EUR/USD | Euro / US Dollar | The most traded currency pair globally |
| GBP/USD | British Pound / US Dollar | Known as “Cable” |
| USD/JPY | US Dollar / Japanese Yen | Influenced by interest rates and BOJ actions |
| USD/CHF | US Dollar / Swiss Franc | Known as a safe-haven pair |
| AUD/USD | Australian Dollar / US Dollar | A commodity-driven pair (linked to gold/iron ore) |
| NZD/USD | New Zealand Dollar / US Dollar | A risk-sensitive pair |
| USD/CAD | US Dollar / Canadian Dollar | Heavily influenced by crude oil prices |
Characteristics of Major Pairs
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High liquidity
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Lower trading costs
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Less volatile than exotic pairs
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Narrow spreads
B. Minor Currency Pairs (Cross Pairs)
These are pairs that do not include USD but involve other major currencies.
Examples of Cross Pairs
| Pair | Name |
|---|---|
| EUR/GBP | Euro / British Pound |
| EUR/JPY | Euro / Japanese Yen |
| GBP/JPY | British Pound / Japanese Yen |
| AUD/JPY | Australian Dollar / Japanese Yen |
| EUR/CHF | Euro / Swiss Franc |
| AUD/NZD | Australian Dollar / New Zealand Dollar |
Characteristics
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Moderate liquidity
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Larger spreads than major pairs
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Driven by economic relations between two regions (e.g., EU–UK, EU–Japan)
C. Exotic Currency Pairs
These pairs include one major currency and one currency from a smaller or emerging economy.
Examples of Exotic Pairs
| Pair | Name |
|---|---|
| USD/INR | US Dollar / Indian Rupee |
| USD/TRY | US Dollar / Turkish Lira |
| USD/ZAR | US Dollar / South African Rand |
| USD/SEK | US Dollar / Swedish Krona |
| EUR/TRY | Euro / Turkish Lira |
| USD/HKD | US Dollar / Hong Kong Dollar |
Characteristics
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Higher volatility
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Wider spreads
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Lower liquidity
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Sensitive to geopolitical and regional economic factors
3. Major Forex Trading Sessions (Markets)
The Forex market is not centralized. Instead, trading happens across global financial centers in overlapping sessions.
A. Sydney Session
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Timezone: Opens the global trading day
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Trades mostly AUD, NZD, JPY
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Market: Australian Securities Exchange (ASX), major banks
B. Tokyo (Asian) Session
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One of the largest Asian FX markets
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Trades JPY, SGD, CNY, AUD
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Markets: Tokyo Financial Exchange, Bank of Japan network
C. London (European) Session
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Largest centre for forex trading
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Trades EUR, GBP, CHF, USD
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Markets: London Stock Exchange, European banks
D. New York (American) Session
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Second largest forex hub
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Trades USD, CAD, GBP, EUR
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Markets: NYSE, major U.S. banks
Overlap Sessions
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London–New York Overlap
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Highest liquidity of the day
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Tokyo–London Overlap
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Moderate liquidity
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Sydney–Tokyo Overlap
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Strong activity in JPY, AUD, NZD
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4. Top 5 Most Traded Currency Pairs
Based on global trading volume and liquidity:
1. EUR/USD
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Largest share of global FX volume
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Used by banks, institutions, central banks
2. USD/JPY
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Strongly influenced by interest rate policies
3. GBP/USD
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Highly liquid and volatile
4. AUD/USD
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Strongly linked to commodity export markets
5. USD/CAD
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Crude oil price correlation is significant
Conclusion
The Forex market is the backbone of global finance, enabling currency conversion, cross-border payments, investment, and international trade. Understanding the differences between major, minor, and exotic currency pairs, as well as the different global trading sessions, is essential for anyone entering the world of currency trading.