The forex market may seem quite complicated to some newbies. Plenty of instruments, calculators, different programs, and strategies - all this can make an unprepared trader's head spin. But to establish successful trading it is not necessary to plunge at once so much new information. At first, it is enough to understand what currency pairs are, as they are the main instrument on the forex market.
Currency In The World Market
In the international market, currencies are sold or bought, by which one unit of money is exchanged for another. The buying and selling are done for different purposes. Some people wish to transfer capital into another country's funds for the sake of travel, while others intend to speculate on exchange transactions. By buying cheap and selling dear, a person enriches themself on the price difference. The more profitable transactions they make, the higher their income will be.
Exchange rates are influenced by a great many factors which should be taken into consideration in making analytical forecasts. A market researcher has to pay attention not only to fundamental news but also to technical signals. By combining several analysis techniques, the investor will be able to achieve the best results. Currency pairs are written in the form of three-letter symbols. It includes two such symbols, spelled with a slash. The order of recording is strictly defined depending on the transaction. Each element has its form and is never written in reverse.
The monetary unit that is written first is called the base currency of the currency pair. The second unit of calculation is called the quoted unit. It is assumed that when making a purchase, an investor buys the base currency for a certain amount of quoted currency. For example, in USD/JPY, 1 U.S. dollar would be worth 133 Japanese yen. When making a purchase, the trader buys the base currency, and when selling, he buys the quoted currency.
The national currencies may differ significantly in popularity and thus in liquidity. The greatest number of transactions are made on "majors" and the least on "exotics". Major world money is in demand because settlement transactions are made at their expense, while the rarest ones are used exclusively in the country of their issuer. In addition to the major and exotic assets, there are cross-pairs.
They are distinguished by the absence of the dollar in the composition. To calculate the movement of such quotes, it is necessary to correlate each national currency with the U.S. and then make the exchange rate calculation. Speculation on such goods is considered extremely difficult and dangerous, so only professionals are engaged in it.
Which Currency Pairs Are Best To Trade?
Major currency pairs are considered the most convenient for trading as they have high liquidity and predictable volatility. The US dollar is used almost in every corner of the world, so it can safely be called the most popular unit of account. The best currency pairs are distinguished from the others by strong economies. The more stable the financial situation of the state, the more stable and predictable its national currency will be. Investing in strong currencies is very profitable because they are unlikely to lose their purchasing power, and thus will reliably preserve capital.
Several currency pairs are comfortable to work with:
- EUR/USD. This currency pair is especially popular on the market and among traders. It has a low spread and high liquidity. It can be found in absolutely any brokerage terminal. This currency pair is very related to the technical analysis, which makes it much easier to predict the direction of the quotes. Low volatility ensures relatively safe trading and is good for beginners.
- GBP/USD. A highly volatile currency pair, which is especially popular with skilled players. It brings a good profit, but only if the price direction is determined correctly. Otherwise, the trader is exposed to great risks. Issuers play an important role on the world stage, so there are a lot of news reports on their economies. Considering the fundamental factors, the investor can easily predict the potential rate.
- USD/JPY. This asset has small spreads in the brokerage terminal, so a trader gets rich even on relatively smooth trends. The dollar/yen pair is well predicted due to the comparison of news reports or technical signals.
To find the best product for your needs, the speculator should determine the key objectives and get acquainted with the information on the subject.
Exotic Currency Pairs
This group consists of products that are not very popular, even though they include the U.S. dollar. These include the MXN and its relation to the USD. Exotics pairs have some important advantages, due to which some traders prefer them:
- Increased volatility allows you to effectively work through aggressive strategies. The trader will be able to make a lot of money on short-term trades, work scalping, and other similar tactics.
- The wide amplitude of exchange rate fluctuations provides coverage of related costs. Sometimes the exotic pairs travel such a distance in a day that it covers commissions and allows one to earn good money.
At the same time, exotics have serious disadvantages:
- First, it exposes the person to significant risks. In some cases, traders lose money on the account in just a few days. Controlling your deposit becomes more and more difficult and funds on it "melt away" with each passing hour.
- Secondly, the analysis of currency pairs is much more difficult due to the lack of fundamental information. Many news is released only in the language of the issuer and the trader has difficulties with translation. One has to scoop information from different sources, and this is fraught with obtaining unreliable data.
In addition, the exotic pairs are often manipulated by market makers, and it becomes almost impossible to predict the price direction.
Commodity Currency Pairs: How To Analyze Them
This group includes national currencies, the issuers of which are states with a commodity-type economy. This means that the financial condition of the country is largely dependent on relations with other countries. The export of raw materials becomes the main source of income for citizens and provides their material well-being. Here we can mention Canada, Australia, New Zealand, and others.
We must take into account the fact that the country, which is an active exchange of finished products, has a non-resource economy. As a rule, such states can provide developed production, but because of the poverty of natural resources, they are forced to buy them from neighbors. On the one hand, such a situation can stimulate the development of scientific progress, but on the other hand, it increases the production costs of enterprises.
To define a resource-based economy, the share of mineral exports must be at least 50-60%. In some states, it reaches even 90% and 100%. To analyze such currencies, it is necessary to know the level of economic development of the issuing countries, GDP growth, and economic and political relations with other countries. If the supply of raw materials is directly dependent on the weather conditions, the trader must keep track of the weather forecast and use it to conclude the potential output. In most situations, an increase in supply reduces the cost, and a decrease in the volume of goods increases it. If there is a deficit in one or another product, the market will try to make large purchases, so the price will go up sharply.
It is also advisable to monitor the level of demand for resources. Some energy raw materials are gradually being replaced by electricity, so the demand for oil and gas falls over time. Thus, the better the technological progress in this industry, the lower the demand and the lower the price.
Risks Of Trading Currency Pairs
When choosing a currency pair for trading, it is advisable to remember the dangers that lurk during speculative activities:
- There is relatively low volatility. The trader can wait for several days, but the rate will move just by 3-5 points. Even with the correct determination of the direction they will lose more on commissions than they will earn.
- Not too favorable risk/reward ratio. The allowable losses are much more than the expected earnings. That is why many investors lose their first capital trading forex.
- A relatively small choice among the highly liquid instruments. It is necessary to take into account that most of the representatives of this group have very low popularity, and therefore are poorly traded on the world floor.
Despite these imperfections of the financial market, many people continue to work exclusively on it. Such tendency is explained by huge leverages, which are provided in brokerage companies. A trader will be able to start trading with $100, but at the same time will be able to trade 500 or even 1000 times more. However, there is a serious disadvantage here as well. If a trader makes a mistake using the high leverage, they will lose a huge amount of money even after the quote has moved one pip.
How To Trade Currency Pairs?
To trade forex and benefit from currency pairs fluctuations, it is worth following some important rules:
- Monitor the correlation of the currency pair. There are charts, which repeat each other. By identifying the forward or backward correlation, a trader will be able to predict price reversals on a third-party chart visualization. Technical analysis of this kind should always be confirmed by signal messages from other indicators or news.
- Always place stop orders. No trader can predict the direction of the course with 100% accuracy, so in any case, they put their capital at risk. To reduce potential losses, one should determine the points, and then set Stop Loss and Take Profit.
- To choose the right product, pay attention to your own needs. Do not make a choice influenced by social pressure or fashion, because the individual may have unique needs and goals.
- Stick to the rules of money management. Do not put up too big a bet on one trade. It is better to gain experience gradually than to lose the entire deposit in the first few days.
- Work only in a calm state. If you feel nervous tension, painful, or irritability, it's better to postpone trading until a more suitable time.
Currency pairs are in high demand in the financial market. They have high liquidity, and the availability of expert analytics at AdroFx simplifies the activity for beginners. However, the choice of assets and trade directions exposes the investor to considerable risks, and before making any decisions and placing any orders, they should understand the peculiarities of the asset in detail.