Basics of Currency Trading

The most liquid and strongest market in the world is currency trading. It cannot be compared to any other market in terms of its total value. Forex trading has an estimated value of around $5-$7 trillion per day. This figure passes the value of all stock market trading in the world.

Trading currency in pairs is buying one currency and selling the other currency at the same time. Setting as an example is the EUR/USD which is the most traded currency pair. EUR stands for Euro and USD stands for US Dollar. In this currency pair, EUR is the base currency while USD is the quoted currency.

This ratio is viewed as a single unit which means that even if it is 2 individual currencies, it is traded as a pair. It is not EUR or USD.

Assuming that EUR/USD is trading at 1.3025, this means that for every €1 = $1.30. This also states that the Euro is stronger than a dollar or it needs more dollars to buy euros.

Some Basic Terms in Currency Trading

·Major Currency Pair

There are six major currency pairs in daily currency trading. These include GBP/USD, USD/CHF, USD/JPY, EUR/USD, and AUD/USD. These major currency pairs have one major currency against the US dollar. These are the most actively traded currency pairs globally and offers the greatest liquidity. It has lower volatility since there is a large number of traders involved. The general agreement on the given price is stronger and harder to distort.

·Minor Currency Pair

Minor pairs are less traded compared to the major currency pairs. These are less liquid and often have wider spreads than the major currency pairs. Generally, minor currency pairs are any currency pairs other than the six major currency pairs.

·Exotic Currency Pair

Exotic currency pairs include currency that comes from emerging market countries. They are called exotic currency pairs because of the additional challenges that come from trading these currency pairs. It has nothing to do with the country or location. These currency pairs are usually illiquid, have wider spreads and fewer market makers. Examples of these currency pairs are South African Rand (ZAR), Mexican Peso (MXN) and Hong Kong Dollar (HKD).

Currency Trading FAQs

·What is the best strategy for currency trading?

There is no best strategy for currency trading. The strategy works best depending on the market or currency, the timeframe of trading, and the trader’s personality or preference. Additionally, what works best previously might not work well in the present or the future since currency trading is inconsistent. Learn as many strategies as possible and focus on one currency until becoming an expert is the best thing to do.

·Is there a difference between currency trading and commodity trading?

There is. The main difference is that commodity trading is speculating on the price movement of physical items including gold, cocoa, crude oil, etc. while currency trading is speculating on the relative value of one currency against the other. People feel more comfortable trading commodities since it is actual physical items or easily understand the price movement compared to more abstract currency markets.

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