Forex market happens to be one of the largest markets in the world. In a day, billions of currencies are traded on the forex market. It is all about buying and selling currency. But the biggest question is on what to trade in this market and how it is done. Forex trading has so much to understand other than knowing it is about currency trading.
Currency Trade & its Key Terms
If you want to get into the forex market and understand how everything runs, then there are several terms you need to understand. You need to know very well how the trades work to be able to participate in the market.
The first term in trading you need to understand is position. The position is a term that used to refer to an ongoing trade. In forex trading, when a trade is continuing, it means that you have either bought or sold currency and you are waiting for changes in the market so that you can buy or sell. Concerning this, you will find two more terms, which include a short position and a long position.
A long position is a term used to describe a case whereby you have bought a currency as a trader, and you are expecting a change in the value of your currency. In that case, when you buy a currency, you will be waiting for the value to increase so that you can sell and gain profit. Once you have sold your currency to the market (at a profit compared to the buying price) then the long position will be termed as “closed,” and your trade is considered as complete.
On the other side, you will find a short position. A short position refers to a case whereby you sell currency as a trader with the expectations that there will be a decrease in its value. Once this happens, you would buy it back at a lower price hence making some profits. A short position will be considered “closed” if as a trader, you happen to rebuy your currency, especially at a price that is lower than how much you sell.
Examples: When as a trader, you have a currency pair such as GBP/USD you may decide to open a short or long position. Here is how it works. GBP/USD may be trading at 1.20/1.22. If you want to invest your money through a long position, it means that you are going to buy a pound with the expectation that it will appreciate and you can sell at a profit. That is one sterling pound at 1.22 USD.
Incase wants to open a short position; it means that you are expecting the sterling pound to depreciate. As a result, you are going to sell one sterling pound at 1.20 USD. Then you will wait for the value of the pound to depreciate to buy again and make a profit.
Most traded currency pairs on the forex market
Knowing about the most traded currency pairs on the forex market is an essential move for any forex trader. It helps you understand how they are traded and know how to utilize them to becomes a successful trader.
Forex market is made up of seven major currency pairs. However, there are other pairs which are classified as crosses and exotic pairs, but they are less traded and illiquid.
Major currency pairs. These are the most traded pair on the forex market. As a result, the account to up to 80% of all the trade in the forex market. Major pairs are currency pairs that are associated with massive, well-managed economies. One advantage of major pairs is that they have low spreads than others and are less manipulated. They have the lowest volatility and highest liquidity. An example is EUR/USD.
Cross Currency Pairs. Cross-currency pairs are essential to know about since you will come across them when trading in forex. They include any pair that does not include a USD. It is simple to identify these pairs. As long as a pair does not have a US dollar, then it is a cross-currency. They have lower liquidity and higher volatility as compared to the major pairs. They may include pairs such as EUR/JPY, EUR/GBP or GBP/JPY.
Exotic Currency Pairs is another pair of currencies that are mostly made of a small economy when paired with a major one. Exotic pairs have more risks when trading in them since they have wide spreads, can quickly shift due to financial and political developments. They are also more prone to manipulation, less liquid and more volatile as compared to other currencies.
Importance of Forex Charts
Understanding forex charts is another essential aspects when you want to do well in forex trading. Forex charts will show you how the trades are trending within a specified period. Forex charts always show time on the horizontal axis and price of currencies on the vertical side. The most straightforward forex charts show two graphs.
A forex graph will show the trade performance of a currency pair. A good example is between EUR and USD with one chart on top and another one on the bottom side. The chart on top shows the selling price of EUR in dollars while the lower chart indicates the buying price of 1 EUR in USD. As these prices shift in time, the graphs record, and you can look at the trends within a specific time.
When the cost of selling a EUR in terms of US dollars rises the graphs on the charts, indicate as well. Same case when there is a fall in prices.
You can also be able to determine spread within a currency pair, which is the difference between the two graphs.
Being able to read a forex chart is an essential aspect as it helps you understand the overall performance of a currency pair. It can easily show you how a particular currency pair has been performing for a specific time.
