Currencies are traded in pairs
Forex trading is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer and traded in pairs; for example, the euro and the US dollar (EUR / USD) or the British pound and the Japanese yen (GBP / JPY).
When you trade the forex market, you buy or sell in currency pairs.
Imagine that all the pairs are constantly in a “tug of war” with each currency on its side of the rope. Exchange rates change depending on which currency is stronger at the moment.
Major currency pairs
Subsequent currency pairs are known as “major”. All of these pairs hold the U.S. dollar (USD) on one side and are most often traded. The main ones are the most liquid and most traded currency pairs in the world: EUR / USD, USD / JPY, GBP / USD, USD / CHF, USD / CAD, AUD / USD and NZD / USD.
Major intercurrency pairs or secondary currency pairs
Currency pairs that do not include the U.S. dollar (USD) are known as intercurrency pairs or simply “crosses”. The main crosses are also known as “minor”. The most actively traded crosses contain three major currencies that are not included in the USD: EUR, JPY and GBP.
Some of the Euro-crosses are: EUR / CHF, EUR / GBP, EUR / CAD, EUR / AUD and EUR / NZD.
The following are considered yen crosses because they use the Japanese yen on one side: EUR / JPY, GBP / JPY, CHF / JPY, CAD / JPY, AUD / JPY and NZD / JPY.
As in Europe, the UK also has its crosses: GBP / CHF, GBP / AUD, GBP / CAD and GBP / NZD.
And here are some other currency pairs that are considered minor: AUD / CHF, AUD / CAD, AUD / NZD, CAD / CHF, NZD / CHF and NZD / CAD.
Exotic pairs consist of a single major currency associated with the currency of a developing economy, such as Brazil, Mexico or Hungary. Here are some examples of exotic currency pairs: USD / HKD, USD / SGD, USD / ZAR, USD / THB, USD / MXN, USD / DKK, USD / SEK and USD / NOK.
Often the spreads are two to three times larger than in EUR / USD or USD / JPY. So if you want to trade exotic pairs, be sure to consider this in your decision.
Because the foreign exchange market is so unusual, traders have come up with several different methods of investing in foreign exchange. The most common of these are the spot forex market, futures, options and exchange traded funds (or ETFs).
In the spot market, currencies are traded immediately or “on the spot” using the current market price. What’s so amazing about this market is its small spreads and round-the-clock operations. It is very easy to participate in this market, because accounts can be opened for only $ 25! And most brokers usually provide charts, news and other information for free.
Futures are contracts to buy or sell a specific asset for a specified fee at a future date. That’s why they are called futures! Forex futures were developed by the Chicago Mercantile Exchange (CME) long ago in 1972. Because futures contracts have certain standards and are traded through a centralized exchange, the market is extremely transparent and well regulated. This means that the price and details of the transaction are readily available.
An “option” is a financial instrument that gives the buyer an opportunity or opportunity, but not an obligation, to buy or sell an investment at a specified price on the expiration date of the option. If a trader has “sold” an option, then he or she will be happy to order or sell the asset for a fee at the expiration date.
Just like futures, options are also traded on an exchange, such as the Chicago Board of Exchange, the International Stock Exchange, or the Philadelphia Stock Exchange. But the disadvantage of trading options on forex is that market hours are limited for certain options, and liquidity is not as great as in the futures or spot market.
Exchange-traded funds or ETFs are the newest participants in the foreign exchange market. An ETF may contain a set of stocks combined with certain currencies, allowing the trader to diversify with other assets. They are produced by financial institutions and can be traded as stocks through an exchange. Like forex options, the limitation in trading ETFs is that the market is not available all the time. In addition, because ETFs hold stocks, they are subject to trading fees and additional transaction fees.