The Basics of Currency Trading

Nov 16, 2020

What type of currencies can be traded?

Currencies are split into three main categories:

  • Majors
  • Minors
  • Exotics

Understandably, majors are the most important, most traded currencies out there. They include powerful currencies such as the United States Dollar and the Great British Pound.  The first letters identify the country’s name, and the third letter identifies the country’s currency.

Majors

The main major currency pairs are EUR/USD, USD/JPY, GBP/USD, and USD/CHF. These currencies are part of the g10 currency group. The most commonly traded currency pair in the world is the EUR/USD.

Major pairs are traded more than any other pairs since they have a lot more volume than other pairs. Low volume pairs are harder to sell or buy without making the asset’s price move substantially. High volume allows traders to enter and exit the market easily and have a large position size.

Minors and Exotics

Minors are all currency pairs that are not paired with the USD but instead with the GBP, JPY, and EUR. These are the most traded currency pairs after the majors but have a significantly smaller market share in comparison to major pairs and much lower liquidity.  The 14 minor currency pairs include EUR/GBP, CAD/JPY, GBP/AUD, GBP/JPY, EUR/JPY, EUR/NZD, EUR/AUD, EUR/CHF, EUR/CAD, CHF/JPY, AUD/JPY, NZD/JPY, GBP/CHF and GBP/CAD.

Exotics are currencies that come from emerging markets and are usually paired with major currencies. These currencies are not traded as often as major and minor pairs and take just a small part of the total forex market. Since they tend to be quite volatile, exotic pairs offer higher returns due to wider price fluctuations. Some pairs include EUR/HUF, USD/SEK, USD/SGD, EUR/TRY, USD/MXN, etc.

The Basics of Currency Trading

The USD is the most traded currency in the world.

How does the Forex market work?

Forex is synonymous with foreign exchange and currency trading. Forex traders trade one currency for another and profit on the difference. The largest and most liquid financial market in the world is, in fact, the forex market (also known as the FX market).

As we mentioned previously, currencies are traded in pairs. One currency for another based on the idea that the currency is being bought will increase in value when the trader exits the trade.

A currency’s exchange rate is the relative price of two currencies from different countries. For example, 1 USD is equivalent to 0.85 EUR at the time of writing. When trading currencies, traders are not buying a physical asset but instead aim to profit from the difference between the two currencies. The process is similar to when an investor buys shares in a company since they invest with the perception that the company will grow in the future.

The forex market is global and fully decentralized, which means that that it does not have localized exchanges like the stock exchange. The FX market operates 5 days a week, 24 hours a day. Currencies represent the health of a country’s economy – those who invest in the currencies see value in them. For example, if you buy the Canadian dollar, you are essentially buying a share in the Canadian economy.