Trade Forex Currency Pairs: The Simple & Concise Guide
How does the forex market work? And most importantly how can you make money off the movements of currency pairs in the market?
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- An overview of forex trading
- What are some strategies to trade forex pairs?
- Which currency pairs hold the most potential?
Imagine you are at a cocktail party and someone asks you what you do for a living. They want to know more about what it is to be a forex currency trader and how you profit from it. You want to explain forex currency trading to them in layman’s terms. From where do you start? How do you explain how the forex market works? And most importantly how do you explain the strategies you use to make money off the movements of currency pairs in the market.
This will be the main aim of this article. We will be explaining in simple terms what forex trading is and how traders starting out profit from trading currency pairs. Excited? So are we. Let’s get started!
An Overview of Forex Trading
Let’s start off with explaining the forex market. The forex market is basically where currencies are traded. Forex stands for foreign exchange and refers to the exchange of one currency for another. You might have already done this when you visit a country with a different currency than your home country. You exchange your money for the foreign currency. Currencies are constantly rising and falling in value. Traders make money from the rise and fall of currency prices.
Why do the prices of currencies fluctuate?
Currencies are affected by the basic logic that govern economics: demand and supply for them. So, what can affect the demand and supply of currencies? Tourism, economic strength, geopolitical risk, interest rates, and trade flows are all factors that can affect the value given to a currency at a particular instance in time.
How do you profit from these market movements?
Traders are presented with the opportunity to make money from the changes that may increase or deflate two currencies when compared to one another.
Traders rely on speculation to try and predict whether a particular currency will either rise or fall. Currencies are always traded in pairs so assuming one currency will rise, automatically means that the other currency’s value will fall when it is compared.
Can you give me an example?
Sure! Let’s say John is a trader who is expecting interest rates to rise in England when compared to the Euro. The exchange rate between the two currencies (GBP/EUR) is currently at 0.81. This means 81cents GBP will buy €1. John believes higher interest rates in the United Kingdom will increase demand for GBP and so the GBP/EUR exchange rate will fall because it will require fewer, stronger GBP to buy EUR.
If John is correct and interest rates do rise, it will decrease the GBP/EUR to 0.60. Now you will need 0.60cents GBP to buy €1. If John chose to short Euro and go long on GBP, then John made some money off this.
What Are Some Strategies You Can Use to Trade Forex Pairs?
Go Long Or Go Short
Given we already mentioned this in our example before let’s explain this one. When a trader goes long it means they are expecting to sell a currency at a higher price than they bought and so a profit will be made. When someone trades short means the trader will sell before he buys with the aim of buying that stock back at a lower price and that’s how he or she will make a profit. Basically, the trader is betting whether the currency value will go up or go down.
This is a good way to go if you are a part-time trader and do not have time to constantly monitor the market. Employing a stop-loss order is when you use a trading program and let it be your partner whereas the technology monitors the market on your behalf. You can also add a stop-loss order to your open trades. This allows your money to stay protected when the market decides to change rapidly.
This is another great strategy for those who do not have a lot of time to dedicate to trading. Instead of looking at hourly charts, try holding your money on a daily or weekly basis. You can choose to select fewer positions and hold them for longer. This will let you still trade but you will not be monitoring the markets so closely with the opportunity to still make money.
Which Currency Pairs Should You be Trading?
Of course, this question needs to be answered by considering the different factors that affect the movement of the price of all currencies at a certain point in time. This is why it is very important to follow the news and make sure you know what the speculators are stating in relation to international news and other data or information that may be available to you.
However, let’s look at the different types of currency pairs below:
Major currency pairs
There are four currency pairs that are considered major, that is are traded in high volumes and are the most popular. They all include USD.
If you are new to trading currencies, it is suggested that you trade liquid currency pairs like EUR>USD or USD/JPY. A liquid currency is one that can be exchanged for another asset very fast due to the high amount of sellers and buyers for this currency pair. This is why they are considered very low risk.
Minor currency pairs
Minor currency pairs are the ones that do not include USD but include at least one of the other three major currencies. They are also known as cross-currency pairs.
These pairs usually include USD paired with a less popular currency such as Mexican Peso or Turkish Lira. These pairs have loess liquidity and are considered costlier to trade and so have a higher risk. This also means there is more chance for higher returns however they are usually traded by more experienced traders.
Where Can I Trade Currency Pairs?
Sage FX offers all of the above types of currency pairs together with metals, indices and energies. Check out the vast range of symbols here and start trading like a sage by logging in or signing up now.