When you talk about buying and selling foreign exchange, what are you really buying and selling? The answer is money. In the forex market, money is the commodity. You are purchasing a currency with the hope that the value of that currency will increase. If you are selling a currency, you are hoping that the value of that currency will decrease.
Currencies are shown in quotes when you trade in the spot market and you trade in pairs. For example the US dollar and the Australian dollar will be indicated at USD/AUD. You are not purchasing a physical commodity and no physical exchange of money ever occurs. This may be confusing for some, but you should think of it as purchasing shares in a public company and all the transactions are carried out electronically within your trading account. The one difference is that the forex market does not operate through a central exchange. Everything is done in a network of financial institutions.
By using the quote offered to you, you can determine the value of one currency to another. The currency that forms the first section of a quote is termed as the base currency, and the other currency is termed the quote currency. The pair indicates the amount of the quote currency you will need to buy a single unit of the base currency.
An example of this is if you are trading the USD/AUD and your quote reads USD/AUD=1.0800. If you are buying this pair, it means that you will have to pay AUD1.0800 for every dollar you buy. If you are selling the pair, you will receive AUD1.0800 for every single dollar you sell. Currencies are always quoted in pairs because you require a value to measure a currency by and because one currency is normally exchanged for another.
Foreign Exchange Major Currencies
Some traders opt to trade the less popular currencies like the Thai baht, but the majority of traders opt to trade the seven most popular currency pairs globally. The four majors are the ones most popularly traded and these include:
- EUR/USD – Euro/US dollar
- GBP/USD – British pound/US dollar
- USD/JPY – US dollar/Japanese yen
- USD/CHF – US dollar/Swiss franc
The other three currencies are less popular with traders and these include:
- USD/CAD – US dollar/Canadian dollar
- AUD/USD – Australian dollar/US dollar
- NZD/USD – New Zealand dollar/US dollar
These pairs and the various combinations are responsible for about 95% of all the speculative trading in the forex market. When you look at the small number of possible trades since there are only 18 actively traded pairs, the forex market is not as wide as the stock market.
Once you have made the decision to enter the foreign exchange trading market, it will be necessary for you to make a decision on the currency pair you wish to trade. It is best that you learn as much as you can about the countries related to your currency pair, and develop a trading plan and strategy before you commence live trading. You need to know the factors that cause movement in the price of your currency pair.
Get a free Forex PDF PLUS:
- 14 Video Lessons
- Free One-on-One Training
- A 5000$ Training Account
- In-House Daily Analysis
- Get FULL ACCESS