What do we trade?
First, it is important to get used to the fact that in Forex, we trade currencies, not physical goods. Currencies are goods like any other, but when you trade forex online, you don’t see or touch the money until you withdraw the profit from your account. The idea behind buying currency is very simple. If you believe that a currency’s value will rise, you buy it with another currency and hold it until you no longer believe it will rise further. If you think a currency’s value will fall, you sell it. Whether you buy or sell, you exchange currencies – buying one currency and selling another (e.g. buying the dollar and selling the euro).
When you buy a forex pair, you always buy the first currency alongside the second one. This means that you are selling the second currency. For instance, if you buy USD/JPY, you are buying the dollar and selling the Yen. It is the same when you sell a forex pair; you always sell the first currency and buy the second.
Currency instruments are always traded in pairs. Imagine a currency pair as a couple of boxers in the ring, caught up in an endless struggle over who is stronger. During the match, each has their stronger and weaker moments, their ups and downs. Sometimes they rest, and sometimes they attack.
Symbols – Each instrument is indicated by 3 letters (the first 2 are the country and represent the base country for that currency, and the third is the currency’s name). For example, USD = U.S. Dollar.
There are 3 main pair categories:
Majors – The 8 most traded pairs in the world, for example, GBP/USD (British pounds/US dollar), USD/JPY (US dollar/Japanese yen), EUR/USD (euro/US dollar). In the next lesson, we will examine all 8 major currency pairs.
Cross Currency Pairs (or Crosses) – All pairs that do not include the US dollar. For example, EUR Crosses are all pairs with the euro, except for EUR/USD (a Major).
Exotic Currency Pairs – Pairs comprising one major currency and one “weaker” currency (from a developing market). These pairs are usually traded in much lower volumes. Commissions on exotic pairs, asked by the brokerages, are relatively high. For example, GBP/THB (British pound/Thai Baht).