The actual meaning of the Foreign Exchange trading is to trade in currencies of different countries globally. This business is coming out as the biggest market with minimum regulations. It also offers the maximum liquidity to the individuals who invest in this market.
The trading business in this market is always performed in terms of pairs, i.e. Currency Pairs. It means that simultaneous buying of one currency and selling of the other one. The exchange rate exists, if we join both these operations; the buying and selling rate.
For instance, you may possibly purchase GBP with Dollars with the expectation that GBP price will increase as compare to that of Dollar. Hence, if the value of British Pound increases in comparison to Dollar, you may sell the position; you therefore, make money in this trading.
The Major Trading Currencies
The major trading currencies in the Foreign Exchange trading market are USD (US Dollar), EUR (Euro), Australian Dollar (AUD), Japanese Yen (JPY), Great British Pound (GBP), Swiss France (CHF) and Canadian Dollar (CAD).
The Main Traded Currency Pairs
In this regard the frequently traded currency pairs are:
- US Dollar and Great British Pound (USD/GBP)
- Japanese Yen and US Dollar (JPY/USD)
- US Dollar and Euro (USD/EUR)
- Swiss Franc and US Dollar (CHF/USD)
In order to quote the currency pairs, the first currency is known as the base currency whereas the second currency is referred as quote currency of counter currency. The base currency is identical to one monetary unit of exchange for the eternity, like one Euro, one Dollar, one Pound, etc.
To Trade Currency Pair to Make Highest Revenue
This is renowned as accounting currency or domestic currency and quite often, it is known by the term of primary currency of a Forex currency pair. The rate depicts what amount of quote currency is required to obtain single unit of the base currency.
If some of the currency is quoted in comparison to the US Dollar, it is considered as direct rate. On the other hand, if a currency is not quoted in comparison to US Dollar, it is known as cross rate.
The quote currency is converted into a particular amount of the base currency. This is also recognized as the secondary currency, counter currency or foreign currency. For instance, if a quotation of USD/JPY shows the figure of 1.45. It means that you will acquire 1.45 Japanese Yen for one US Dollar. Likewise the figure of GBP/CHF is 54.36, and then you will get 54.36 Swiss Francs for one GBP.
Base Currency Trading
By and large 100,000 units of the base currency are traded for currency pairs. For instance, if you were purchasing CAD/USD at 0.80; it means that you would be making payment of US$ 80,000 for 100,000 Canadian Dollars. This amount has been derived by multiplying 100,000 with 0.80.
If you feel that a quote is rising, it signifies that there is an increase in the base currency value. You can also state that base currency is getting stronger. On the other hand, if the quote is declining, then it depicts that the base currency is falling.
Dominant Base Currencies
The leading base currencies are:
- British Pound: GBP/JPY, GBP/USD, GBP/CAD, GBP/CHF
- US Dollar: USD/JPY, USD/CHF, USD/CAD
- Euro: EUR/JPY, EUR/USD, EUR/CAD, EUR/CHF, EUR/GBP
Generally the quotation and trading of currency pairs are denoted with the terms bid price and ask price. Bid is actually the rate at which you intend to purchase and ask depicts the rate at which you are aspiring to sell.
For instance, if the USD/CHF currency pair quotation shows the figure of 1.3. If you buy this pair, it shows that for each 1.3 Swiss Francs that you are selling, you will get the amount of one US Dollar. If you sell this currency pair, you will acquire 1.3 Swiss Francs for every single US Dollar sold by you.
Key to Successful Trading
Your success depends upon in choosing at least one or two currency pairs that you aspire to trade as a newbie. Once you become self assured, you may append additional pairs in your trading assortment. However, for a novice trader, it is always recommended to confine to one or two currency pairs in order to easily administer the transactions.