At its core, Forex trading is the process of buying and selling currency for profit. By speculating on the exchange rate, the trader is trying to buy or sell the currency to make a profit. With Forex, you can get confused by the abundance of charts, constantly changing numbers and incomprehensible alphabetic values. But in fact, having understood the basic concepts, you can quickly understand the essence of what is happening and start making money.
The basic concept on Forex is the rate. It is on these exchange rates that the trader has to first understand.
Rate - the value of an asset in the market, which is determined by demand.
The main asset on Forex is any currency and its value is determined by the number of units of another currency. Thus, they are a currency pair, a key element of Forex trading.
the ratio of the value of one currency to the value of another.
The very concept of a currency pair was introduced for a simpler understanding of new positions in currency trading. You can often hear how they say “buy the euro-dollar” or “sell the euro-dollar”. We are talking about a currency pair, which consists of those two currencies involved in the transaction. The price of the currency pair are related to each other, as the deal is concluded simultaneously with both, because when buying one currency, the trader simultaneously sells the other and vice versa. These two currencies form the exchange rate and are the subject of a trading operation.
Currency pairs are written in the form of special three-letter codes, which consist of a base currency (it is indicated by the first and is on the left) and a quote currency (is indicated by the second and is on the right). For example, the US dollar is denoted as USD, and the euro as EUR. Take the EUR / USD pair as an example: the base currency is - EUR, the quoted - USD. That is, in this purchase (BUY), the trader buys euros for dollars. Similarly, on sale (SELL) the EUR / USD pair sells euros for dollars.
Making a profit or losing money depends on the change on the difference in prices of the currencies (spread). If a bidder wants to buy a pair of USD / EUR, this means that he thinks that the base currency will strengthen against the quoted one. This is called "take a long position."
If he intends to sell a pair of USD / EUR, then he is confident that the base currency, on the contrary, will weaken in relation to the quoted one. This is called "take a short position." Fluctuations in Forex prices are influenced by many factors: inflation, interest rates, economic indicators, political news, import-export and much more.
Types of currency pairs
Currency pairs themselves are divided into several types, but there are several main ones:
The main currency pairs (majors)
these are the most popular pairs, they account for about 80% of Forex trading. The main difference between such a pair is the presence of the US dollar (USD / EUR, CAD / USD and the like) in it. They have the highest liquidity among all types of currency pairs.
Crosses (mixed currency pairs or minors)
pairs in which there is no US dollar (for example, GBR / EUR, NZD / JPY). Liquidity is less than that of the majors.
Exotic currency pairs
a pair which involves a main currency and a small currency from a developing country (for example, MXN / USD, CHF / NOK). They have the least liquidity and are characterized by large spreads.