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Beginner’s Knowledge Guide to Trading in Foreign Exchange Market

The Foreign Exchange Trading Market is the largest decentralized global investment market in the world, and it continues to grow annually. It is a market where every currency in the world is traded. Foreign Exchange Trading is also called Currency Trading in India.

What is Foreign Exchange Trading?

In simple terms, Foreign Exchange Trading means buying, selling or exchanging currencies at a current price or determined prices. The currency values depreciate and appreciate as a result of a variety of geopolitical and economic factors. The objective of any foreign exchange trader is to leverage the fluctuations of the currency prices and make profits. All foreign exchange transactions are usually done in pairs because when you buy one currency, you are selling another. Foreign exchange trading markets are open 24 hours a day and 5 days a week.

What is Base Currency?

The first currency that appears on the foreign exchange pair quotation is termed as the base currency. The base currency is considered as the accounting currency or the domestic currency. Base currency is used to determine how much quote currency is needed to get one unit of the base currency. For example, if you are looking at a CAD/USD currency pair, then your base currency would be CAD.

What is Quote Currency?

The second currency that appears in a currency pair in foreign exchange pair quotation is termed as quote currency. It is often referred to as the counter currency or the secondary currency. The quote currency is a foreign currency. For example, if you are looking at a CAD/USD currency pair, then your quote currency would be USD.

What Determines Currency Prices?

The currency rates are largely impacted by a variety of political and economic conditions. Some of the most significant ones include international trade, interest rates, government’s debt, political stability and performance, and inflation. Often the government participates in the Currency Trading Market in order to influence the value of their currency. This is termed as the Central Bank Intervention.

What Are The Commonly Traded Currencies?

Some of the most traded currencies in the world are listed below.

USD-United States Dollar
GBP-Great Britain Pound
CAD-Canadian Dollar
JPY- Japanese Yen
AUD-Australian Dollar
CHF-Swiss Franc
NZD-New Zealand Dollar

What Are The Different Types Of Currency Pairs?

In the foreign exchange market, the value of any currency is determined through its comparison to another currency. Any currency pair shows how much of a quote currency is required to acquire one unit of the base currency. The different types of currency pairs available for trade in the foreign exchange Market are as follows.

Major Currency Pairs

Major currency pairs are the currency pairs that comprise of the most traded currencies worldwide. The major currency pairs form the largest foreign exchange market share. Hence these currencies are massively liquid, and you can always virtually trade them. Some examples of major currency pairs are GBP/USD, USD/JPY, AUD/USD, USD/CHF, USD/CAD, and EUR/USD. Note that each of these pairs has USD as the base currency or the quote currency. All Major Currency Pairs have USD on one side. The reason behind this is that the USD is the world’s leading reserve country and 88% of the world currency trade comprises of USD.

Minor Currency Pairs

When a currency pair does not involve the USD however comprise of other commonly traded currencies, it is called a minor currency pair. Minor currency pairs are also referred to as cross currency pairs. Some examples of minor currency pairs are EUR/AUD, GBP/JPY, NZD/JPY, EUR/GBP, GBP/CAD, and CHF/JPY. Some of the most popularly traded minor currency pairs comprise of EURO, British Pound and Japanese Yen.

Exotic Currency Pairs

An exotic currency trade refers to a currency pair which has one major currency such as EUR, GBP, JPY, USD, AUD, NZD, CAD or CHF and one currency of a developing economy such as HKD (Hong Kong Dollar), TRY (Turkish Lira), ZAR (South African Rand), SGD (Singapore Dollar), and INR (Indian Rupees). Some examples of exotic currency pairs would include EUR/TRY, GBP/INR, NZD/SGD, USD/HKD, and JPY/ZAR.  You will not find exotic pairs as often as you will find major currency pairs or minor currency pairs.

Which Pairs Should You Trade In?

As a beginner, it is advisable to stick to Major Currency Pairs and Minor Currency Pairs. These Currency Pairs are easier to find and trade in. It is difficult to work with Exotic Currency Pairs because they are not as liquid as the Major and Minor Currency Pairs. Even though Exotic Currency Pairs are riskier than the other pairs, however, they have the potential to pay off more significantly.

Remember the best traders in the market sharpen their trading skills through discipline, practice, and self-retrospection. As a trader, you must learn to keep greed and fear out of the equation. No matter where you are in your trading journey you must define your financial goals and zero down upon a compatible trading style. Make foreign exchange market trend analysis a regular habit to gain better insight into the market trends. This will also help you to select an appropriate trading strategy and stick to it. Another useful foreign exchange trading tip is to choose your entry and exit timeframe carefully. It is also very important to choose a reputable broker that offers you an appropriate trading platform. You must be updated with any significant news that can in any way impact the foreign exchange trading market at any given point of time. It is imperative to stay persistent. However, as you grow in your foreign exchange trading journey, your needs will change, and your foreign exchange trading strategies should prudently reflect the same.

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About the Author: Praveen Unnikrishnan

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