Unrealistic expectations are usually the main reason as to why Forex trading is considered very touch. This is especially the case for beginners who get carried away by the “get rich quick” scheme, which is not the true reflection of Forex trading.
Forex Trading, the foreign exchange market, or FX for short, is the marketplace where currencies are being exchanged. This can be as simple as changing from USD to EUR for your upcoming trip to Europe. On a daily bases, banks, governments, corporations, and traders exchange up to $5 billion.
Currencies on the Forex marketplace are traded in pairs. For example, the EURUSD pair exchanges EUR to USD. The value of the pair, in the case of EURUSD, is measured based on the value of the Euro against the US dollar. Each time the value increases, the value of the Euro increases against the US dollar. Every time the value decreases, the value of the Euro decreases against the US dollar.
Traders who trade on the Forex marketplace make profits off these currency movements, but predicting these movements is harder than you might think.
Tradable Forex Pairs
On the Forex marketplace, there are major and minor currencies. As you might think, the major currencies are the ones that are the most traded currencies, and those are:
- USD – US Dollar
- EUR – Euro
- JPY – The Japanese Yen
- GBP – British Pound
- CHF – Swiss Franc
- CAD – Canadian Dollar
- AUD – Australian Dollar
- NZD – New Zealand Dollar
A major currency pair is considered any of these currencies against the US dollar such as AUDUSD, USDNZD, USDGBP, etc. A minor currency pair is considered any of these against each other without the USD, for example, EURGBP, JPYGBP, CADCHF, etc.
There is also a third type of currencies called exotic currencies. These we haven’t mentioned and they include the following:
- HKD – Hong Kong Dollar
- NOK – Norwegian Krone
- ZAR – South African Rand
- THB – The Thai Baht
An exotic pair is a combination between one of the above-mentioned with any major currency.
How Does Forex Trading Work?
The first thing you see, when forex trading, is that each pair has a “bid” and “ask” prices. According to www.hsb.co.id, the “bid” price is the one you should look if you want to buy a currency, while the “ask” price is the one you should look if you want to sell a currency.
A long trade is when you purchase a currency in a trade, with the hope that its value will increase so you can sell it for profit. The opposite can be applied if you’re looking to make a profit while selling a currency; you sell it for much higher and look to buy it back for a lower price.
How Much Does The Value of a Currency Change?
The value of the second currency in the pair changes depending on how liquid the currency is. Liquid means how much of the currency is being bought and sold at any one time. The currencies with the highest supply and demand are the ones that are the most liquid. Supply and demand are generated by banks, businesses, importers & exporters, and ordinary traders.