In lesson 1 (What is Forex) we defined Forex as a global market for buying & selling currencies. And because you will probably be trading currency pairs more than you will be trading other assets, I’ll take this lesson to enlighten you about currencies and why it is very important to know them.
What is a currency?
Currency is the medium of exchange for both products and services. Simply put, currency is money.
However, you will not be buying physical products in Forex – which might be a bit confusing but I promise to make it simple.
In Forex, everything is done online. You buy one currency online, sell another over the internet and even make profits online.
When you buy these currencies try to think of it like buying shares in the US or buying stock in Safaricom Kenya (or a company of your choice.
When you buy the USD online, think of it as basically buying shares in the US economy.
In other words, you are forecasting that the US economy is doing well and might continue to do well in the future.
If that turns out to be true and you sell back the currencies you bought then you will make profits.
Your profits will reflect on your trading account and you can withdraw your money at any time – to your local bank account.
Sounds easy, right? Yes, it is easy.
Since you now understand that everything in Forex is about money, hold patience at heart and try to take in as much as possible from this lesson. Also note that Forex platforms use symbols of currencies – the most traded being the ones listed on the table below.
CURRENCY COUNTRY SYMBOL NICKNAME
US dollar United States of America USD buck
Euro In 17 eurozone countries EUR fibre
Pound sterling Great Britain GBP cable
Japanese yen Japan JPY yen
Swiss franc Switzerland CHF swissy
Canadian dollar Canada CAD loonie
Australian dollar Australia AUD aussie
New Zealand dollar New Zealand NZD kiwi
How do Currency Pairs Work?
[click_to_tweet tweet=”Forex trading involves buying of one currency and selling for another. Together, the bought and the sold currency form a pair.” quote=”Forex trading involves buying of one currency and selling for another. Together, the bought and the sold currency form a pair.” theme=”style6″]
Example, when you choose to trade a pair that has the US dollar – Yen also USD/JPY, you are predicting that the USD will rise higher than the JYP in value. In this case you will buy the USD and sell the JPY.
If the USD rises against the yen then it means your prediction is right – so you will make some profits. The opposite of this statement is true.
If you still don’t understand then try relating trading currencies to buying real products. In this example lets use a potato to stand in place of the USD and the yen as the currency for purchase.
In order to buy the potato (USD) you’ll need to give away your cash (yen). The value you get in the potato is your profit.
If the potatoes are are less tasty (below your expectations); that’s your loss.
Currency pairs are further categorized into 3 groups: –
Major Currency Pairs.
This group of currencies are called majors because they are the most traded worldwide.
PAIR COUNTRY OF ORIGIN MEANING
EUR/USD Eurozone/USA Euro – US dollar
USD/JPY USA/Japan US dollar – Yen
GBP/USD United Kingdom/USA Pound sterling – US dollar
USD/CHF USA/Switzerland US dollar – Swiss franc
USD/CAD USA/Canada US dollar – Canadian dollar
AUD/USD Australia/USA Australian dollar – US dollar
NZD/USD New Zealand/USA New Zealand dollar – US dollar
Minor Currency Pairs.
Minors are currency pairs which do not contain the USD. It is worth noting though that the most traded ones are the ones which pair with EUR, JPY, and GBP.
EURO MINORS YEN MINORS POUND MINORS OTHER MINORS
EUR/CHF EUR/JPY GBP/CHF AUD/CHF
EUR/GBP GBP/JPY GBP/AUD AUD/CAD
EUR/CAD CHF/JPY GBP/CAD AUD/NZD
EUR/AUD CAD/JPY GBP/NZD CAD/CHF
EUR/NZD AUD/JPY NZD/CHF
These are currencies that are’t as much traded but are highly liquid. They contain one major currency as the base currency paired with a non-major currency – often the South African rand, Mexican peso, or Danish krone.
Here are some examples of exotic pairs.
PAIR COUNTRY OF ORIGIN MEANING
USD/HKD USA/Hong Kong US dollar – Hong Kong dollar
USD/SGD USA/Singapore US dollar – Singapore dollar
USD/ZAR USA/South Africa US dollar – South African rand
USD/THB USA/Thailand US dollar – Thai baht
USD/HUF USA/Hungary US dollar – Hungarian forint
USD/MXN USA/Mexico US dollar – Mexican peso
USD/DKK USA/Denmark US dollar – Danish krone
USD/SEK USA/Sweden US dollar – Swedish krona
Currency Pairs Trading Tip – The highest profits are in majors