Currencies are traded in pairs
Currency trading is the simultaneous purchase of one particular currency and the sale of another. Currencies are traded through a broker or dealer and are traded in pairs; for example, the euro and the US dollar (EUR / USD) or the British pound and the Japanese yen (GBP / JPY).
When you trade the currency market, you buy or sell in currency pairs.
Imagine all pairs constantly in a “tug of war” with each coin on its own side of the string. Exchange rates change depending on the currency that is the strongest at the moment.
Major currency pairs
The following currency pairs are known as “majors”. All of these pairs contain the US dollar (USD) on one side and are the most frequently traded. The main ones are the most liquid and traded currency pairs in the world: EUR / USD, USD / JPY, GBP / USD, USD / CHF, USD / CAD, AUD / USD and NZD / USD.
Major currency pairs or minor currency pairs
Currency pairs that do not include the US dollar (USD) are known as cross currency pairs or simply “crosses.” Major crosses are also known as “minor”. The most actively traded crosses contain the three major currencies other than USD: EUR, JPY, and GBP.
Some of the euro crosses are: EUR / CHF, EUR / GBP, EUR / CAD, EUR / AUD and EUR / NZD.
The following are considered Yen crosses because they use the Japanese Yen on one side: EUR / JPY, GBP / JPY, CHF / JPY, CAD / JPY, AUD / JPY, and NZD / JPY.
Like Europe, Great Britain also has its own crosses: GBP / CHF, GBP / AUD, GBP / CAD and GBP / NZD.
And here are some other currency pairs that are considered minor: AUD / CHF, AUD / CAD, AUD / NZD, CAD / CHF, NZD / CHF, and NZD / CAD.
Exotic pairs
Exotic pairs are made up of a major currency related to the currency of an emerging economy, such as Brazil, Mexico, or Hungary. Here are some examples of exotic currency pairs: USD / HKD, USD / SGD, USD / ZAR, USD / THB, USD / MXN, USD / DKK, USD / SEK, and USD / NOK.
It is not uncommon to have spreads two or three times larger than those of the EUR / USD or the USD / JPY. So if you want to trade exotic pairs, remember to consider this in your decision.
Because the currency market is so extraordinary, traders came up with a few different methods of investing in currencies. Of these, the most common are the spot market for currencies, futures, options, and exchange-traded funds (or ETFs).
Spot market
In the spot market, currencies are traded immediately or “spot”, using the current market price. The amazing thing about this market is its small margins and its 24-hour operations. It is extremely easy to participate in this market as accounts can be opened with as little as a $ 25 investment! And most brokers typically provide charts, news, and other information for free.
Futures
Futures are contracts to buy or sell a particular asset at a particular rate at a date in the future. That is why they are called futures! Forex futures were designed by the Chicago Mercantile Exchange (CME) long ago in 1972. Since futures contracts have certain standards and are traded through a centralized exchange, the market is extremely transparent and well regulated. This means that the price and details of the transaction are readily available.
Choices
An “option” is a financial instrument that gives the buyer the ability, or option, but not the obligation, to buy or sell an investment at a specified price on the option’s expiration date. If a trader “sold” an option, they would be happy to order or sell an asset at a specific rate on the end date.
Like futures, options are also traded on an exchange, such as the Chicago Board Options Exchange, the International Stock Exchange, or the Philadelphia Stock Exchange. But, the disadvantage of trading forex options is that the market hours are limited for particular options and the liquidity is not as great as that of the futures or spot market.
Exchange Traded Funds
Exchange traded funds or ETFs are the newest members of the forex market. An ETF could contain a set of stocks in combination with some currencies, allowing the trader to diversify with other assets. These are produced by financial institutions and can be traded like stocks through an exchange. Like currency options, the restriction in ETF trading is that the market is not accessible during all hours. Also, since ETFs contain stocks, they are subject to additional trading fees and transaction fees.