Trading in Forex

Trading in Forex is a relatively simple process where one currency is exchanged for another. These two currencies are known as the ‘currency pair’, for example the EUR/USD which is the Eurozone against the US Dollar. To place the trade the transaction is conducted by two Forex Dealers (market makers), who can be anywhere worldwide, either over the phone or over the internet. As Forex trading is non-delivery you won’t be receiving bags full of money at the end of the transaction, traders simply profit or lose on the price movement of the trade (the fluctuations in price).

Currency Pairs

As mentioned, currencies are traded in pairs and are quoted in a shortened form such as; EUR/USD. The first quoted currency is referred to as the “base” currency, whilst the second quoted currency is referred to as the “counter” currency.

If a Trader is trading long in the EUR/USD it means they are buying the EURO (base currency) and selling the US Dollar (counter currency). The counter currency is the value of the price movement and what your profit or loss will be quoted in. 

For example; if you bought EUR/USD your profits would be displayed in US Dollars (not in Euro).

Majors

The most popular pairs with the highest trading volume (85%) are more commonly known as the “majors”.  It is advisable to stay within these pairs unless you have a particular strategy otherwise.

Some of the major pairs actually trend in the same direction the most of the time: these are the EUR/USD with the GBP/USD, the USD/JPY with the USD/CHF, and finally the NZD/USD and the AUD/USD.

Other pairs spend most of their time trading in completely opposite directions to one another, these are EUR/USD and USD/CHF, the GBP/USD and USD/JPY, and finally the AUD/USD and USD/CAD. Traders can trade more than one of these pairs knowing that they are most likely to either move in the same direction or opposite direction.

Crosses

Some traders prefer to trade other currencies other than the US Dollar so the “crosses” provide them that avenue. However, these crosses offer much less liquidity compared to the “majors”. The most active three major, non USD, currencies are EUR, JPY and GBP.