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What is Forex Trading and Why You Should Try it?

Updated on June 9, 2018

Forex Trading Definition

Forex trading can also be known as currency trading or foreign exchange. In short, it is a decentralized market where currencies are traded. What does traded mean in Forex? well, the simple answer is money exchange.

Why money? This is because everything we buy and sell in this market is not tangible or physical. Similar to buying stocks of a company or shares in a country, in the Forex market we buy currencies.

How do we estimate the monetary worth of a currency?

In general, the value of a currency is a reflection of the market's opinion about the economy of a respective country, its present, and its future. Basically, in the Forex market when you buy an Australian dollar, you are buying a "share" in the Australian economy.

Therefore, by buying an Australian dollar, you are believing that Australia's economy is going well, and it will be better in the future. Once you sell those "shares", you might, hopefully, ended up with some profit!

To sums up, the exchange rate of a currency versus other currencies is a reflection of the condition of that country’s economy, compared to other countries’ economies.

What are the currency symbols?

The currency symbols are 3 letters. The first 2 represent the name of the country and the last one, identifies the country's currency. For example, in the case of "usd", "us" stands for the United States, and d stands for a dollar.

It is important to take into account that there are major and minor currencies. The former ones are usd (United States / dollar), eur (Europe / euro), jpy (Japan / yen), gbp (Great British / pound), chf (Switzerland / franc), cad (Canada / dollar), aud (Australia / dollar), NZD (New Zealand / dollar) . While the latter is the rest of currencies.

Major Currencies

SYMBOL
COUNTRY
CURRENCY
NICKNAME
usd
United States
dollar
Buck
eur
Eurozone
euro
Fiber
jpy
Japan
yen
Yen
gbp
Great Britain
pound
Cable
chf
Switzerland
franc
Swissy
cad
Canada
dollar
Loonie
aud
Australia
dollar
Aussie
nzd
New Zealand
dollar
Kiwi

This table shows the major currencies in the forex trading market. As you can see, the first two letters stand for the name of the country, and the last letter stands for the currency of that respective country.

Is your income growing as you buy and sell currencies?!
Is your income growing as you buy and sell currencies?! | Source

Currency Pairs: What to Buy, What to Sell?

In the Forex market, we buy a currency and sell another simultaneously. For instance, the U.S dollar and the Japanese yen (usd/jpy) or the British pound and the U.S dollar (gbp/usd). Therefore, in this market, we buy and sell currencies in pairs. It is important to notice, that exchange rates will fluctuate based on the currency that is stronger at the moment of the transaction.

The "major" currency pair contains the U.S dollar on one side and usually are the most traded. In addition, they are the most liquid and widely traded currency pairs worldwide. These pairs are the following: eur/usd, usd/jpy, gbp/usd, usd/chf, usd/cad, aud/usd, nzd/usd.

Generally, the currencies that do not contain the U.S dollar are known as cross-currency pairs or simply as the “crosses". "Minors" is the name given to the Major crosses. The most actively traded crosses are derived from the three major non-usd currencies: eur, jpy, and gbp.

Also, there are other currency pairs known as the exotic pairs, which contain one major currency paired with the currency of an emerging economy, such as Mexico, Brazil, or Hungary. Keep in mind that these pairs are not as heavily traded as the “majors” or “crosses,” so the transaction costs associated with trading these pairs are usually bigger.

Major Currency Pairs

Currency Pair
Countries
FX Geek Speak
eur/usd
Eurozone / United States
euro dollar
usd/jpy
United States / Japan
dollar yen
gbp/usd
United Kingdom / United States
pound dollar
usd/chf
United States/ Switzerland
dollar swissy
usd/cad
United States / Canada
dollar loonie
aud/usd
Australia / United States
aussie dollar
nzd/usd
New Zealand / United States
kiwi dollar

This table shows the major currencies pairs.

Euro Crosses

Currency Pair
Countries
FX Geek Speak
eur/chf
Eurozone / Switzerland
euro swissy
eur/gbp
Eurozone / United Kingdom
euro pound
eur/cad
Eurozone / Canada
euro loonie
eur/aud
Eurozone / Australia
euro aussie
eur/nzd
Eurozone / New Zealand
euro kiwi
eur/sek
Eurozone / Sweden
euro stockie
eur/nok
Eurozone / Norway
euro nockie

This table shows the euro crosses.

Yen Crosses

Currency pair
Countries
FX Geek Speak
eur/jpy
Eurozone / Japan
euro yen or yuppy
gbp/jpy
United Kingdom / Japan
pound yen or guppy
chf/jpy
Switzerland / Japan
swissy yen
cad/jpy
Canada / Japan
loonie yen
aud/jpy
Australia / Japan
aussie yen
nzd/jpy
New Zealand / Japan
kiwi yen

This table shows the yen crosses.

Pound Crosses

Pair
Countries
FX Geek Speak
gbp/chf
United Kingdom / Switzerland
pound swissy
gbp/aud
United Kingdom / Australia
pound aussie
gbp/cad
United Kingdom / Canada
pound loonie
gbp/nzd
United Kingdom / New Zealand
pound kiwi

This table shows the pound crosses.

Exotic Currency Pairs

Pair
Countries
FX Geek Speak
usd/hkd
United States / Hong Kong
 
usd/sgd
United States / Singapore
 
usd/zar
United States / South Africa
dollar rand
usd/thb
United States / Thailand
dollar baht
usd/mxn
United States / Mexico
dollar mex
usd/dkk
United States / Denmark
dollar krone
usd/sek
United States / Sweden
dollar stockie
usd/nok
United States / Norway
dollar nockie

This table shows the exotic currency pairs.

Other Crosses

Pair
Countries
FX Geek Speak
aud/chf
Australia / Switzerland
aussie swissy
aud/cad
Australia / Canada
aussie loonie
aud/nzd
Australia / New Zealand
aussie kiwi
cad/chf
Canada / Switzerland
loonie swissy
nzd/chf
New Zealand / Switzerland
kiwi swissy
nzd/cad
New Zealand / Canada
kiwi loonie

Advantages of the Currency Exchange Market

Now, I will answer the question "why you should try forex?". This can be answered by simply telling you the main advantages of the forex market. So, here they are:

1. There is no commission

In the Forex market, most of the retail brokers are paid for their services through something called bid/ask spread, which is the difference between the bid and offers price. Therefore, you do not need to pay an extra commission, brokerage fees, exchange fees, or government fees.

2. There are low barriers to entry

You can open an account with only $25! Compared to trading stocks, getting started as a currency trader is very cheap. In this sense, forex trading market is accessible to the average person who does not have a lot of capital.

3. There are no middlemen

You can trade directly in the currency trading market without an intervention of the middlemen. In addition, you are the responsible for the pricing on a particular currency pair. Consequently, in the Forex market, you have the freedom to chose!

4. There is high liquidity

The currency trading market is extremely liquid. This is because the market is enormous, so with only one click you could buy and sell instantaneously, and be sure that there will be someone willing to take the other side of your trade.

5. There is not fixed lot size

In this market, you can determine the position size or lot, which can allow you to participate with accounts as small as $25. However, in my opinion, open an account for such amount of money is not advisable!

6. Leverage

In this market, you can control a large total contract value with only a small deposit. You could make nice profits and keep risk capital to a minimum. For instance, with $500 you could trade $25000. It is important to consider that without a proper risk management you could have large losses!

7. There is low transaction cost

Under normal market conditions, the retail transaction cost (the bid/ask spread) is commonly less than 0.1%. At larger dealers, the spread could be as low as 0.07%. Of course, this depends on your leverage.

8. No one can corner the market

In the Forex trading market, there is no a particular entity that controls the market price for an extended period of time. This is because there are a lot of participants that make it impossible!

9. It is a 24-hour market

The Forex trading market never sleeps! There is not an opening time in this market. It operates from the Monday morning opening in Australia to the afternoon closing in New York. It is perfect if you want to trade only on a part-time basis because you could do it at any time!

Are you ready for your success?
Are you ready for your success? | Source

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