“Forex Trading” or “Foreign Exchange Trading” is the trading of currencies of the countries across the world. When such a trade occurs, it results in either an increase or a decrease in the value invested.
The purpose of this forex trading is that currency which is bought is expected to increase in value as compared to the currency of the one that is being sold. The quote of the two currencies is termed as the “Currency pair.” The “Base” currency is the first currency, while the “Quote” currency is the second one in the Currency pair. Consider the currency pair of theUnited StatesandJapan. It is denoted by the International Standards Organization’s code abbreviation symbols USD/JPY, where the base currency is the U.S.dollar and the quote currency is the Japanese Yen. The Bid or the Buy Price is defined as the amount of quote currency (JPY) that is needed to buy one unit of the base currency (USD) and the Ask or the Sell Price is the amount of the quote currency (JPY) that is needed to sell one unit of the base currency (USD).
‘Going long’ on the currency pair USD/JPY means that you are expecting that in future, the U.S. Dollar will gain value against the Japanese Yen and so, you would buy the currency pair. Similarly, if you ‘go short’ on the currency pair, it means that you feel that the U.S. Dollar will most likely lose value against the Japanese Yen and then you would prefer to sell the currency pair.
There are some nicknames given to some of the world currencies, as follows:
USD – Buck AUD – Aussie CAD – Loonie
Euro – Fiber NZD – Kiwi GBP – Cable
Major Currency Pairs
If one of the participating currencies in the currency pair is the U.S. Dollar, the said pair is called a Major. Example: EUR/USD, GBP/USD, etc.
Cross Currency Pairs
They are also called as Minor Currency Pairs. In such forex currency pairs, the U.S. Dollar is not a participating currency.
Examples: GBP/EUR, EUR/JPY, JPY/CHF, etc.
Euro Cross Currency Pairs
If one of the currency pairs is a Euro, then the pair is called as the Euro Currency Pair. Examples: EUR/AUD, EUR/GBP, etc.
Pound Cross Currency Pair
As the name indicates, one of the traded currencies is the Sterling Pound. Examples: GBP/ CAD, GBP/CHF, etc.
Yen Cross Currency Pair
Here, the Japanese Yen is a participating currency. Examples: EUR/JPY, GBP/JPY etc.
Aussie Cross Currency Pairs
One of the currency pairs is the Australian Dollar. Examples: (AUD/ CAD), (AUD/ CHF), etc.
When one of the currency pairs is that of a country that is slowly developing in its industrial economy, the currency pair is called an Exotic pair. Examples of Exotics are: USD/TRY (where TRY stands for Turkish Lira), USD/ ZAR (where ZAR is the South African Rand), etc.
The currency pairs that are most widely traded in the world are the Majors. They have very high market liquidity. Examples of the same are: GBP/USD, EUR/USD, USD/CAD, etc. As one of the traded currencies is the U.S. Dollar, one needs to carefully follow how the U.S. Dollar is presently performing. In the case of Cross Currency trading, when the trading countries have considerable differences in their interest rates, geographical and political conditions, it may prove to be a beneficial transaction. As for Exotics, on account of the substantial spread between the bid and ask prices, the cost of trading is quite high. In addition, their market depth is also quite low. Hence, there is lesser trading observed and that too, may more often be to assist international trade.
Forex trading is a continuous cash market which can be done at any time for twenty four hours of the day and five days of the week; with a global network comprising many countries, far and near. Thus, a maximum number of currencies can be traded in a high volume which allows opportunities for generous profits. With no upper limits for directional trading, there is extreme liquidity as far as buying and selling of the currency pairs is concerned. It is especially appealing, for, even with a low margin, one can do leveraged trading with a minimally-sized account.
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