You decided to take a vacation in Australia from America and so, you packed your bags, took your passport, sat on a plane, and flew to Australia. But now you are at the airport, deciding what to do next. What’s the first thing that comes to mind? It must be about trading your American dollars foe Australian dollars. So, you go to the nearest Forex trading center to trade your money. Now you have some Australian dollars thanks to a Forex trade and leave the airport happily.
But wait, do you realize what you just did? You just participated in and contributed to the Forex market which is the biggest liquid market followed by the stock market. You must be wondering when you participated in the trade. Well, the moment you traded one currency for another currency, you became a Forex trader. The simultaneous exchange of one currency to another currency is the main basis of Forex trading. So, needless to say, without buying and selling of currencies, the Forex market is worthless.
Currencies are always sold in pairs through a medium, either a broker or a dealer.
So how do you make a profit when you buy or sell currencies?
The monetary value of two currencies is never the same and the value of one currency against another currency is never the same. In a currency pair, there is always an exchange rate which depends on the relative price of one currency with another. Whenever the demand for a currency increases against its paired currency, its value increases. That’s how you can make a profit by buying and selling currencies.
Let’s say that you exchanged your 100 USD for 146 AUD but there is still money left when you leave for America. You exchanged your 146 AUD and instead of receiving 100 USD, you got 107 USD. That means while you enjoyed your vacation in Australia, the demand for Australian dollars increased causing a fluctuation in the exchange rate. As a result, you made a profit of 7 USD! Isn’t that great?
Most often, exchange rate fluctuations are influenced by economic performance and political issues including inflation and other.
Major currency pairs in Forex trading
In Forex trading, there are three major categories of currency pairs. These are:
The Major currency pairs are the most traded and always include the US dollar on one side.Quick fact: These pairs are among the most traded as well on the eToro app. You can read more about it here: wikitoro.org/etoro-app
The fluctuation rate of these pairs is more frequent than the rest and comes with more trading opportunities.
There are eight major currencies in the Majors including the US dollar. The other seven are- the Euro (EUR) the Japanese Yen, the Pound, the Swiss Franc (CHF), the AUD or the Australian dollar, the CAD or the Canadian dollar, and last but not least, the New Zealand dollar also referred as the NZD.
In the world of Forex, the majors are the most liquid currencies meaning they are the most active in this field. Go to the site go to url of Saxo to know more about the market liquidity. By gaining more knowledge, you can easily trade like the elite traders in Hong Kong.
2. The Crosses
Any currency pair that does not involve the US dollar is known as a cross-currency pair. Even pairs that include currencies from the majors excluding US dollars are termed as cross currency pairs.
The liquidity rate of the cross-currency pairs is not as much as the majors but still, these pairs occupy a large portion of the market while providing plenty of trading opportunities.
The Euro, the Japanese Yen, and the Pound are the most traded non-USD currencies that actively take part in cross currency pairs.
The currency pair where there is a major currency paired with the currency of an emerging economy is known as exotic currency pairs. The currencies of Brazil, Chile, Hungary, Mexico, and Turkey fall into the category of exotic currencies.
The transaction costs for these currencies can be a bit higher than the majors and cross-currency pairs since these pairs are not frequently traded as the other two.
Besides the major three categories of paired currencies, there are some other currency pairs like the G10 currencies, The Scandies, CEE currencies, and many more. But as you move forward and learn more about Forex trading, you will gradually get to know more about these currencies and gather more information about them. Until then, good luck!