Basics Of Forex Trading And How The Exchange Takes Place

The foreign exchange market has a huge impact in the global economy. And, this whole idea has been termed as the Forex currency market. Individuals from all around the world can trade currency because Forex is a global setup. The main function of this setup is to simplify the process of buying, selling and exchanging currencies at the given price. If you are new to this concept, you will find lots of new terminologies that would seem complicated and difficult, but once you get the hang of what they are and how they function, you will cruise through. Before going into the details, it is important that you understand the basics of Forex trading.

Currency pairs

One of the most important parts of CMC markets is the pair of currency in hand. In a currency pair, you will have two currencies that will be traded. There will not be a third currency in one pair and it is possible to exchange the pairs any time you want. You will find some common pairs like USD/EUR and there are some uncommon pairs as well such as MXN/USD. The good thing is, you can choose from the various options in hand like “exotics”, “crosses”, “major pairs” and many others. For those who are still not sure as to what currency pairs are or what they mean, it is more like an attack and counter attack. The only difference here is of base currency and counter currency. Base currency takes up the first place while the counter currency takes up the second place. So, for a EUR/USD pair, EUR would be the base while USD is the counter currency. Forex trading takes place when the exchange rate of a particular pair rises. When this happens, the value of the base currency rises to that of the counter currency. However, if the condition is vice versa, as in the exchange rate goes down, the value of counter currency will rise compared to that of the base currency.

Impact of currency pairs

Whenever you need to exchange a currency through Forex, it is important that you know the rate of the counter currency. Exchange takes place in respect to the amount of counter currency that you need to buy for one currency of the base. Suppose you are trading between USD/MXN and the ratio stands at 1.5000. This means, 1.5 MXN would be bought for a value of 1 USD. The same thing happens with other currencies as well. There are many people who will say that there are around 6 or 7 major currency pairs, but if you ask a veteran, he will say that there are actually four major pairs. It is true that there are 7 pairs involved in Forex trading, but when it comes to driving the market, only four pairs are involved. They are heavily traded every day and Forex traders hardly need to venture into the other currencies apart from the four that bring them considerable amount of money. The four pairs that are considered the lifeline of Forex trading are Gopher- USD/JPY, Euro- EUR/USD, Swissie- USD/CHF and Cable- GBP/USD. Liquidity in these currency pairs is huge and that is why most people are into these pairs.

Best of the lot

Amongst the four currency pairs, the EUR/USD pair is the most popular. This is because of the fact that they are two of the largest economies this world has ever seen and these two currencies are used widely all over the world. However, this does not mean that the other three major currencies are not used in the trade. If you follow the stats of CMC markets, you will see how influential the Euro pair has been. The other three are also used widely, but they are specific to a few countries. An interesting thing about all the four pairs is that they make similar movements and if one part of a pair falls, the other will also fall. These four do not follow the typical base and counter currency theory. This is the main reason why a trader does not stick to one pair for a long period of time. Changing the pairs would reduce the risk level to a great extent.