Lesson 2 – Trading For Beginners | What is Traded in Forex?

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.

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But first,

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.

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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.

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CURRENCYCOUNTRYSYMBOLNICKNAME
US dollarUnited States of AmericaUSDbuck
EuroIn 17 eurozone countriesEURfibre
Pound sterlingGreat BritainGBPcable
Japanese yenJapanJPYyen
Swiss francSwitzerlandCHFswissy
Canadian dollarCanadaCADloonie
Australian dollarAustraliaAUDaussie
New Zealand dollarNew ZealandNZDkiwi

How do Currency Pairs Work?

Forex trading involves buying of one currency and selling for another. Together, the bought and the sold currency form a pair.Click To Tweet

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.

PAIRCOUNTRY OF ORIGINMEANING
EUR/USDEurozone/USAEuro – US dollar
USD/JPYUSA/JapanUS dollar – Yen
GBP/USDUnited Kingdom/USAPound sterling – US dollar
USD/CHFUSA/SwitzerlandUS dollar – Swiss franc
USD/CADUSA/CanadaUS dollar – Canadian dollar
AUD/USDAustralia/USAAustralian dollar – US dollar
NZD/USDNew Zealand/USANew 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 MINORSYEN MINORSPOUND MINORSOTHER MINORS
EUR/CHFEUR/JPYGBP/CHFAUD/CHF
EUR/GBPGBP/JPYGBP/AUDAUD/CAD
EUR/CADCHF/JPYGBP/CADAUD/NZD
EUR/AUDCAD/JPYGBP/NZDCAD/CHF
EUR/NZDAUD/JPYNZD/CHF
NZD/JPYNZD/CAD

Exotics.

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.

PAIRCOUNTRY OF ORIGINMEANING
USD/HKDUSA/Hong KongUS dollar – Hong Kong dollar
USD/SGDUSA/SingaporeUS dollar – Singapore dollar
USD/ZARUSA/South AfricaUS dollar – South African rand
USD/THBUSA/ThailandUS dollar – Thai baht
USD/HUFUSA/HungaryUS dollar – Hungarian forint
USD/MXNUSA/MexicoUS dollar – Mexican peso
USD/DKKUSA/DenmarkUS dollar – Danish krone
USD/SEKUSA/SwedenUS dollar – Swedish krona

Currency Pairs Trading Tip – The highest profits are in majors 

How to Verify Your XM Account With ID Only.

Learn How to Trade Forex – Lesson 1, What is Forex?

Lesson 2 – Trading For Beginners | What is Traded in Forex?

Lesson 3 | How to Make Money Trading Forex in Kenya | XM FX.

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