Let us define currency trading.
We can say that currency trading is very liquid and strong because many people trade in this market. It is incomparable to other types of trading. If we estimate the value of forex trading, also known as foreign exchange trading, we look somewhere around $5 to 7 trillion in one day. This massive digit stands out from any other type of stock market globally.
Talking about the basics when trading currencies
Currency trading is always done in pairs. In this pair, a trader sells one and buys the other currency. To elaborate more, let us take the EUR/ USD as an example. Currencies have symbols and legends. When we say EUR/USD, EUR is the equivalent of Euros while USD represents the US Dollar. In the EUR/ USD pair, the EUR or Euro is the base currency while the USD or US Dollar is the quote currency.
We can also call the EUR/USD pair a ratio where we view these two currencies as a single unit because technically, we trade them as a pair, not as EUR or USD individually.
Explaining currency trading further
Let us say that the EUR/USD pair ratio is currently trading at 1.2345. In this case, one Euro is worth 1.23 US dollars. We can also conclude that the base currency, the Euro, is comparably stronger than the US Dollar since it is .23 higher. Meaning, you will need more dollars to buy Euros.
Let us learn a few basic terminologies used in currency trading
If you are enthusiastic in learning how to trade currencies, you might want to read more on the jargon traders commonly use in currency trading.
- The major currency pair. EUR/USD, AUD/USD, USD/CAD, USD/JPY USD/CHF, GBP/USD: These six pairs are the ones that you will encounter and see most of the time because they are the ones that traders mostly use due to their high liquidity. Also, traders can say that they are less volatile since, again, a lot of traders use them. These currencies are solid and hard to beat. If we translate the symbols, EUR stands for Euro, USD stands for the US dollar, AUD stands for the Australian dollar, JPY stands for Japanese yen, CAD stands for the Canadian dollar, GBP stands for the Great British Pound, and CHF stands for the Swiss Franc.
- The Minor Currency pair. These currencies are the opposite of the major currencies since they are less traded. Also, their spread is wider compared to the major currencies. As a result, they are less liquid. We consider any other currency not included in the six major currencies as minor currencies.
- Exotic currency pair. Contrary to the name that “exotic currency pair” connotes, the term has nothing to do with their location. They have such assignments because of the charges incurred when using these. Usually, they have wide spreads, few market makers, and no liquidity. Some examples include HKD or the Hongkong Dollar, ZAR or the South African Rand, and MXN or Mexican peso.