As you know, the Forex currency market is based on the buying and selling of currencies of certain countries. It is based on the exchange rate; This means the purchase of one currency in exchange for the sale of another one, simultaneously.
For that reason the currency market is always traded in pairs. Before operating in the foreign exchange market, it is important that you start to understand the basic terminology of the market and know how to interpret correctly the currency market quotations.
What are pairs?
The Forex market trades by buying and selling currencies from different countries. A pair is the combination of two different currencies that are used to take a positions on the market.
Usually the first currency is known as the base currency, as this is not moving and the second currency that will comply with the pair, is called counter currency.
The base currency is also known as primary and base coin currency as currency trading. The base currency will always be = 1 and the value will vary depending on the pair base coin you choose and the value this has in the international market.
It is important that you know what are the main currencies traded in the Forex market and its acronym in English, since at the time of operation usually only use the acronym. Later we will tell you what the most used pairs are:
- AUD = Australian Dollar
- CAD = Canadian Dollar
- JPY = Japanese Yen
- EUR = Euro
- GBP = Great British Pond
- USD = U.S. Dollar
- CHF = Swiss Franc
- NZD = New Zealand Dollar
Following is an overview o some important things to know about the most traded currencies in the market:
The U.S. Dollar: USD
Currently, there are other major currencies to the dollar, as the Euro, Japanese Yen, the Pound Sterling and Swiss Franc moving against the U.S. currency. But the dollar is still known as the World’s currency. Most currencies are quoted in dollar terms and some of the currencies of other countries are closely linked to it. This currency became the leading one at the end of WWII, but today by the global economic crisis and recession in the U.S. has ceased to be.
The Euro: EUR
The euro is the official currency of 16 of 27 member states of the European Union as of 2009. The states, known collectively as the Euro zone, are Austria, Belgium, Cyprus, Slovakia, Slovenia, Spain, Finland, France, Greece, Holland, Ireland, Italy, Luxembourg, Malta and Portugal. The currency is also used in five other European countries, both official and non-agreed form and thus is in daily use by about 327 million Europeans. After it’s appearance in December 1999, the Euro replaced the German mark and quickly became the second currency in the world and every day gains more acceptance. The Euro has a strong international presence, regardless of exposure to various political economic factors that may affect them.
Japanese Yen: JPY
The yen was fixed to U.S. dollar exchange rate of 362 yen per dollar since April 25, 1949 to 1971. Then it has appreciated significantly. Currently the exchange rate is about 90 yen per dollar, or about 118 yen per euro. This is the third most used currency in the world for this kind of transaction, making the market very liquid 24 hours a day. Since much of the eastern economy moves according to Japan, the yen is quite sensitive to factors such as agricultural production in eastern and technological factors.
The British Pound: GBP
The pound was originally the weight value of a pound of sterling silver (hence it’s called “sterling”). This was the reference currency to the beginning of World War II, most transactions take place in London today is the largest international market in the world despite its low volume during operation in the American sessions.
The Swiss Franc: CHF
The Swiss franc is legal currency in Switzerland and Liechtenstein. Although its weight in the global economy cannot be compared to the euro or the dollar, the stability of the country they belong to makes be taken into account as a “safe haven”, particularly after the assessment as to the European currency from April to September 2000. Its value is around two thirds of a euro. This is the other major European currency that is not part of the Euro but neither is part of the G-7, but in turn is favored in terms of political uncertainty that may involve the economic community. Practically it can be said that the Swiss Franc, behaves quite similar to the Euro against the dollar.
How to know what pairs you should trade?
The best opportunities for a successful trade and earning money, are those where you trade with currency pairs are usually more used on the market and that, therefore, are those that are highly liquid.
For example, you can buy Euros with Dollars, expecting and anticipating that the Euro will increase its value against the dollar. If the euro rises against the dollar, you sell the position and can make money.
Another more specific example, when trading with the following pair: USD / EUR = 1.5 and you purchase a pair; this means that for every 1.5 Euros that you sell, you get $ 1. If instead, you sold the currency pair, you receive 1.5 Euros for every $ 1 you sell.
The four most widely used currency pairs in Forex trading are:
- U $ Dollar / Japanese Yen (USD / JPY)
- Euro / the U.S. Dollar (EUR / USD)
- Pound Sterling / U.S. $ Dollar (GBP / USD)
- U $ Dollar / Swiss franc (USD / CHF).
- The U $ Dollar / Canadian Dollar (USD / CAD)
- The Australian dollar / U.S. $ Dollar (AUD / USD)
28% of global transactions relate to the Euros / dollars pair, 18% against the dollar / yen and 14% with the pair Pound / dollar.
These are pairs that are are advised to use due to high liquidity that already have the frequency of use within the market. For novice traders, it is recommended that use be limited to only one or two different pairs at the same time for best results. When being a skilled trader you can take risks and experiment with different positions opening up several pairs.
For best results into trending markets, trade the currencies of each session. Better yet if it is during first 2-3 hours of the opening and/or closing of each session.
Finally do not forget, you can become a successful trader if you receive specialized education and constant knowledge.