What is Currency Trading?
The famous phrase money never sleeps – coined by the well-known Hollywood movie Wall Street – sums up the foreign currency exchange market perfectly. No matter what time of the day forex market will be open to facilitate trade. So let’s understand Currency Trading, it is an action of exchanging one nation’s designated form of currency with another’s. All trade here is a trade-off between the pairs of currencies from two different countries.
When you began trading you may find yourself overwhelmed by the number of currencies and won’t know which pairs to trade-in.
What are currency pairs?
Forex trading is all about buying and selling of currencies in pairs. For buying and selling of currencies, you must have information about how much currencies in pairs are worth in terms of others. A currency pair quotes two currency abbreviations followed by the value of the base currency based on the currency counter.
Types of currency pairs:
There are four types of currency pairs. Let us discuss them in little details.
Majors: The ‘major’ forex currency pairs are the major countries that are paired with the US Dollar. Not surprisingly, the most dominated and strong currency which is widely used is the US Dollar. Here are some pairs which constitute, Major:-
- EUR/USD (Euro-US dollar)
- USD/JPY (US dollar – Japanese yen)
- GBP/USD (British pound – US dollar)
- AUD/USD (Australian dollar – US dollar)
- USD/CHF (US dollar-Swiss franc)
- USD/CAD (US dollar – Canadian dollar)
The value of these major countries keeps fluctuating according to each other as trade volume keeps on changing between the two nations.
Commodity Currency: A commodity currency is a name given to currencies of that country which highly depend on the export of raw materials for income. The major currencies considered as Commodity currency are Australian Dollar, New Zealand Dollar, and Canadian Dollar. Gold and Silver are also considered as Commodity currencies.
Crosses: Those currencies which are not paired with US Dollar are called as Crosses. Some of the crosses are as follows,
- AUD/CAD – Australian dollar vs. the Canadian dollar
- AUD/NZD – Aussie dollar vs. the New Zealand dollar
- CAD/JPY – Canadian dollar vs. the Japanese yen
- CHF/JPY – Swiss franc vs. the Japanese yen
- EUR/AUD – Euro vs. the Australian dollar
- EUR/CAD – Euro vs. the Canadian dollar
- GBP/AUD – British pound vs. the Australian dollar
- GBP/CHF – British pound vs. the Swiss franc
- NZD/JPY – New Zealand dollar vs. the Japanese yen
Though not all crosses are worth trading, so you need to be very careful while selecting which one to trade with. Mainly these AUD/JPY, EUR/JPY, GBP/JPY, and NZD/JPY are considered to be the better crosses.
Exotics: The “exotics” are those pairs that consist of developing and emerging economies rather than developed and already industrialized economies like the majors. Here is a list of some of the more commonly traded exotics:
USD/TRY – U.S. dollar vs. the Turkish lira
EUR/TRY – Euro vs. the Turkish lira
USD/ZAR – U.S. dollar vs. the South African Rand
USD/MXN – U.S. dollar vs. the Mexican peso
USD/BRL – U.S. dollar vs. the Brazilian real
Exotics are not the best place to start trading with. They are much less liquid compared to others which make it riskier.