Currency Trading Basics

The forex market also acknowledged as FX or currency market is a financial market worldwide where the trading of currencies is performed over-the-counter. Financial centers all over the world work as trading anchors between a huge range of different kinds of purchasers and sellers 24 hours a day with weekends being the only exception. Learn about the currency trading basics here.

Forex Transactions

The chief objective of the forex market is to provide international trade as well as investment by permitting businesses to transform one currency to another type of currency. For instance, it allows a U.S. enterprise to import goods from Europe and pay Euros, though the income of the business is in USD. It also encourages speculation, and even makes the carry trade possible, wherein investors are given access to low-yielding currencies while also allowing them to lend or invest in currencies with high yield that may result to loss of competitiveness in some countries.

The basics of currency trading will help you gain knowledge of a typical FX transaction and even a few currency trading tips. In a standard foreign exchange transaction, a party buys a particular amount of one currency by disbursing a specific amount of another currency.

The contemporary FX market began establishing itself during 1970s when most countries progressively switched to floating exchange rates from the past exchange rate system, which continued to be fixed as per the Bretton Woods system.

The foreign currency trading basics will make you realize that this trading platform is distinct because of the:

  • Immense trading volume, resulting to high liquidity
  • Continuous transactions and operations: 24 hours a day excluding weekends
  • Geographical distribution
  • Several factors that influence exchange rates
  • Low margins of relative revenue when matched against other markets with fixed income
  • Use of leverage to improve profit margins relative to trading account size

Due to these factors, currency trading has been deemed as the market nearest to perfect or ideal competition.

Most Traded Currencies

Even though many retail dealers trade unusual currencies like Czech koruna or Thai baht, the greater part trades the seven currency pairs known as most liquid in the world.

The four majors are:

  • Euro/Dollar = EUR/USD
  • Dollar/Japanese Yen = USD/JPY
  • British Pound/Dollar = GBP/USD
  • Dollar/Swiss France = USD/CHF

The three popular commodity pairs are:

  • Australian Dollar/Dollar = AUD/USD
  • Dollar/Canadian Dollar = USD/CAD
  • New Zealand/Dollar = NZD/USD

The above currency pairs, together with their numerous combinations like GBP/JPY, EUR/JPY, and EUR/GBP account compose more than 95% of all the foreign exchange speculative trading.

With the diminutive number of trading instruments – about 18 pairs as well as crosses are being aggressively traded on a daily basis.

Understanding “Carry”

A commodity trading advisor will familiarize you with “carry”. Carry is the most known trade in the forex market performed by both the heftiest hedge funds and even the smallest trading speculators. This type of trade relies on the fact that each currency in the world comes with a specific rate of interest. The short-term rates of interest are predetermined by the central banks of such countries. The main idea behind carry is very straightforward. You choose a currency with high rate of interest and purchase it with a currency with low rate of interest.

FX Jargon

Every investing platform has its distinct jargon, and the currency trading market is no different. While stock market investing basics will let you become aware of the stock market terms, forex trading strategies on the other hand will familiarize you with the FX jargon.

The following are some of the terms you need to retain into memory that will make you look and sound like an expert or seasoned currency trader:

  • Yard – Stands for a billion units, like “I successfully sold a yard of sterling.”
  • Pound, sterling, cable – These are alternative terms for GBP
  • Buck, green buck – U.S. dollar’s nicknames
  • Aussie – Australian dollar’s nickname
  • Swissie – Swiss franc’s nickname
  • Kiwi – New Zealand dollar’s nickname
  • Loonie, the little dollar – Canadian dollar’s nickname
  • Figure – Foreign exchange term implying a round number such as 1.2000

Final Note

You can learn about the currency trading basics for free online. You just have to be careful in choosing the resources to ensure that the information you’ll receive will be beneficial and helpful to your FX trading venture.

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