Basic Facts About Currency Trading
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Trading Basic Facts About Currency Trading- While the forex market can be a mysterious and intimidating place for the uninitiated, it doesn’t have to be. In this online guide, we pull back the curtain to show aspiring traders how the currency market works.
Forex: An Introduction
The global forex market is the biggest and most liquid financial market in the world. Short for foreign exchange, forex trading occurs within the international currency trading market where you buy or sell one currency for another. Central to making a profit (or loss) in forex trading is the exchange rate between the two currencies.
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A currency’s value on the forex market is based on demand. How much demand there is for a Canadian dollar, Mexican peso, or South African rand will either increase or decrease its worth relative to other currencies.
There are three main types of forex trader, and discovering which one you are can be hugely powerful. From planning your strategy to mapping out your trading hours, knowing your trader type can impact your entire approach to trading. Which type are you?
You could be a scalper, taking advantage of small, minute-by-minute changes in currency prices.
You could be a day trader, taking an hour-by-hour view of the market, enjoying significant price fluctuations without the edge-of-the-seat experience of scalping.
Or you could be a swing trader, looking at timeframes of up to two weeks in order to benefit from larger economic trends.
Each three trader types are unique, and each benefits a very specific type of person.
Let’s find out which one you are.
One feature of international forex trading is that there is no centralized exchange. Currency trading is completed over computer networks between traders and forex brokers worldwide. People interested in forex trading can participate 24 hours a day, five days per week. Because of the high volume, currency price quotes regularly change — sometimes in mere seconds.
Basic Facts About Currency Trading:
Currencies are always traded in pairs. If you are trading Australian dollars for euros, you have two currencies in the transaction, and you can see the cost of one currency compared to the other. For every pair, there is a market price attached. This refers to how much of the second currency (also known as the quote currency) it takes to purchase a single unit of the first currency (also known as the base currency). If you as a trader see a quote like GBPUSD 1.77351, for example, you would know that it costs 1.77351 U.S. dollars to purchase one British pound.
The forex market uses symbols for currencies. Common currencies include:
- Australian dollar=AUD
- British pound=GBP
- Canadian dollar=CAD
- Chinese yuan=CNY
- Japanese yen=JPY
- New Zealand dollar=NZD
- Swiss franc=CHF
- U.S. dollar=USD
The most commonly traded pairs, also known as major pairs, involve the US dollar and other common currencies. These include:
- EURUSD (euro against the US dollar)
- USDCAD (US dollar against the Canadian dollar)
- USDJPY (US dollar against the Japanese yen)
- GBPUSD (British pound against the US dollar)
- AUDUSD (Australian dollar against the US dollar)
- NZDUSD (New Zealand dollar against the US dollar)
So Who Trades Forex?
Everyone from banks, to corporations, to fund managers, to those with no previous financial trading background are involved in forex trading. Because the forex market is accessible online and because retail forex brokers make it possible to trade on virtually any budget, growing numbers of individual investors are getting involved in the forex market.
Understanding how and when to trade minor currency pairs is an essential skill for any developing forex trader. In this article we’ll explore exactly what constitutes a minor pair, the advantages and disadvantages of trading them, as well as how to time your trade to get the greatest chance of upside while managing risk.
Definition Of A Minor Currency Pair
A minor currency pair is a cross between two major currency pairs excluding the US dollar. This is in contrast to a currency cross, which is simply any pair that does not include the US dollar. To clarify, all minor currency pairs are also currency crosses, but not all currency crosses are minor forex pairs. Minor currency pairs must be made up of crosses including the British pound (GBP), the Japanese yen (JPY) or the euro (EUR).
Examples of Minor Currency Pairs
EUR/GBP – Euro/British pound
EUR/AUD – Euro/Australian dollar
EUR/NZD – Euro/New Zealand dollar
EUR/CAD – Euro/Canadian dollar
EUR/CHF – Euro/Swiss franc
Japanese yen Crosses:
EUR/JPY – Euro/Japanese yen
GBP/JPY – British pound/Japanese yen
AUD/JPY – Australian dollar/Japanese yen
NZD/JPY – New Zealand dollar/Japanese yen
CAD/JPY – Canadian dollar/Japanese yen
CHF/JPY – Swiss franc/Japanese yen
British pound Crosses:
GBP/AUD – British pound/Australian dollar
GBP/NZD – British pound/New Zealand dollar
GBP/CAD – British pound/Canadian dollar
GBP/CHF – British pound/ Swiss franc
Pros And Cons Of Trading The Minors
Minor currency pairs are used by traders because of their ability to provide low-risk high-reward trade setups that play out over the long-term. Such trading opportunities are ideal for the medium-term to long-term trader, although less suitable for the day trader.
Despite the fact that the major currency pairs are the most liquid forex pairs, minor currency pairs also have significant trading volume which make them suitable as trading instruments. Indeed, some of the major crosses have an average daily volume that is much greater than that of some stock exchanges.
Furthermore, given that most traders focus on trading the major currency pairs regardless of their price action, the minor currency pairs can provide excellent opportunities for the more discerning trader. Many of the traders who trade the minor forex pairs look for high probability trade setups that might not be present in the major currency pairs.
Minor forex pairs are not without their challenges however. They are generally less liquid than the major currency pairs and as such they typically come with wider spreads. This can be challenging for some day traders, who rely on the low spreads offered on major currency pairs to make their profits through strategies such as scalping. The high spreads associated with most minor pairs can therefore quickly erode their potential profits.
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The low liquidity associated with some of the minor pairs can also on occasion lead to delays in obtaining prices in the market. This can cause significant losses if you are trying to get out of a losing trade. The lower liquidity can also lead to more frequent order slippage, which could significantly reduce your profits.
The Best Time To Trade The Minor Currency Pairs
Although the forex markets are open 24 hours a day, five days a week, there are three major trading sessions associated with the open and close of different financial markets across the globe.
The main trading sessions are:
- The Asian/ Tokyo session
- The European/ London session
- The American/ New York session
The Asian session is considered to run from 23:00 GMT to 08:00 GMT due to the influence of markets such as New Zealand, Australia, Singapore and China. Many traders typically avoid this trading session due to the low liquidity associated with it as only the Asian markets are open. However, currencies such as the Japanese yen, the New Zealand dollar and the Australian dollar can make significant moves during this session.
The European session generally runs from 07:00 GMT to 16:00 GMT and is represented by the London financial markets. The London session accounts for about 30% of all forex transactions and is the most volatile session due to the large number of transactions that occur in this period. Volatility is good for most price action traders who profit from changes in prices. The British pound, euro and Swiss franc are most active in this session.
The North American session runs from 1200 GMT up to 2000 GMT and is represented by the New York financial markets. The New York session overlaps with the London session and the overlap period usually features high liquidity and might offer good trading opportunities. The close of the American session generally marks the close of the forex markets