The world is a big place but globalization has made it feel small. Unlike in the past, moving from one country to another takes a few hours. Communicating with people in other countries is free when you use tools like WhatsApp and Skype. Buying goods and services has also been made easier. The implication of all this is that movement of money has become easy. As a result, many people are participating, directly and indirectly, in the vast industry of foreign exchange. In this article, we will look at the currencies traded on Forex.
What is Forex?
Forex is the short form of foreign exchange. It is a simple term that refers to the practice of exchanging currencies. This transaction is better explained with an example. Assume the exchange rate between euro and dollar is 1.1100. If you are moving to the United States with, €1,000, it means that you will arrive in the United States with $1,110. If the exchange rate drops to 1.1000, you will have slightly above €1,000.
The foreign exchange market is the biggest market in the world. Every day, traders exchange currencies worth more than $5 trillion. The differential in prices mentioned in the previous example may look small. However, in large scale, the profits generated in forex can be enormous.
In the past, the forex trading business was a reserve of big banks and investment groups. This is because the technology behind it was not available to commoners. The computers, software, and networking technology was unaffordable to many people. Today, the low cost of internet and computing devices has made it easy for people to trade in currencies. In fact, you will find people in developing countries trading currencies on their smartphones.
Currencies Traded on Forex
There are hundreds of currencies in the world. However, these currencies are usually not measured the same way. This makes sense. For example, the US dollar does not have the same value as the Zimbabwe dollar. The euro is not the same to the Bolivian dollar. As such, currencies have been put in several categories:
Currency majors are those currencies of major countries that have the USD as the base or counter-currencies. These currencies are the most popular in the world in terms of volume. Examples of the common currency majors are:
- EUR/USD – Euro/Dollar
- USD/JPY – Dollar/Yen
- GBP/USD – Pound/Dollar
- AUD/USD – Australian dollar / US dollar
- NZD/USD – New Zealand dollar / US dollar
- CHF/USD – Swiss franc / US dollar
- USD/CAD – US dollar / Canadian dollar
The major currencies are known for their high liquidity. Liquidity is the idea of being able to enter and exit trades with ease.
These are currencies of major countries that don’t have the US dollar sign. Examples of these pairs are:
- EUR/JPY – Euro / Japanese yen
- EUR/GBP – Euro / sterling
- CHF / JPY – Swiss franc / Japanese yen
- GBP/CAD – Sterling / Canadian dollar
- EUR/AUD – Euro / Australian dollar
Exotic Currency Pairs
These are currencies that combine a major currency and that of emerging market currencies. These currencies are known for their low liquidity. Examples are:
- USD/ZAR – US dollar / South African rand
- USD/TRY – US dollar / Turkish lira
- USD/MXN – US dollar / Mexican peso
- USD/HKD – US dollar / Hong Kong dollar.
A relatively new type of currency that is currently being traded is crypto. These are digital currencies that are changing the world of finance. There have been concerns on whether to classify crypto as currencies or commodities. For example, there is no other currency that is mined. Still, since Bitcoin can be used for making purchases, many categorize it as a digital currency. Examples of cryptocurrencies are:
- BTC/USD – Bitcoin / US dollar
- ETH/USD – Ethereum / US dollar
- XRP/USD – Ripple / US dollar
- BCH/USD – Bitcoin Cash / US dollar
- EOS/USD – EOS/ US dollar
How to Trade Currencies on Forex
We previously wrote about how to make money day trading currencies. In the article, we wrote more about currency pairs, what moves them in the short and medium term, and how to manage risks. We recommend that you read that article. In short, you should follow the following steps when day trading currencies.
- Use a demo account. If you are a new trader, sign-up for a demo account. A demo gives you all the tools you need to learn to trade.
- Analyse currency pairs. Conduct technical and fundamental analysis to predict the direction of a currency pair.
3. Trade. Finally, you should initiate a trade. You can either buy or sell short a currency pair. You buy when you expect the price will move higher and short when you expect it to drop.
Summary on Currencies Traded on Forex
There is more to forex trading than the points we have mentioned below. For example, there are concepts like swaps, leverage, margin trading, and trading psychology you will need to know. Having an understanding of the concepts we have covered above will be a good place to start your journey as a trader.
Crispus is a finance professional with more than a decade experience in the industry. Over the years, Crispus has written in-depth articles on leading platforms like CCN, Marketwatch, and Seeking Alpha. He also runs a Forex education and managed account company called WestEndFx.