Forex Currencies
Definition
Currencies are vital in the forex market because they make the purchase of goods and services locally and worldwide possible. In order to conduct a foreign trade or business, international currencies need to be exchanged. Currency trading takes place in the foreign exchange market.
Facts
The trading of currencies is done in pairs. In the forex market traders need to buy one currency and sell another one, unlike other markets. Also, almost all currencies are priced out to the fourth decimal point besides pairs that include the Japanese Yen (JPY) as the quote currency.
Pairs
If we take the currency quote for the EUR/USD pair ($1.1256) the base currency is the euro while the U.S. dollar is the quote currency. In all currency quotes, the base currency is worth one unit. The quoted currency is the amount of currency that one unit of the base currency can buy. So, one euro can buy 1.1256 U.S. dollars.
Pip & Lot
A pip, which stands for percentage in point, refers to the smallest increment of trade. Usually, one pip equals 1/100 of 1% or the number in the 4th decimal point. Currency trading occurs in various sized lots. The micro-lot is 1,000 units of a currency. For example, if you deposit U.S dollars in your account, a micro lot represents $1,000 of your base currency, the USD. A mini lot is 10,000 units of your base currency while a standard lot is 100,000 units.
Reasons we can we trade currencies
Before the invention of the internet, currency trading was not an easy job for individual investors. Since forex trading required a big capital, traders of currencies included: large multinational corporations, hedge funds or high-net-worth individuals. However, with the emergence of the internet, individual traders could have easy access to the foreign exchange market, either through banks or online brokerages. Most online forex brokers offer very high leverage to individual traders who can invest in a large trade with a smaller initial account balance.
Top forex pairs
Interestingly, a currency pair that does not involve the USD is known as a ‘Cross rate’, or Cross. Popular Crosses include the EUR/JPY, GBP/JPY, and EUR/GBP.
There are more or less 8 major currency pairs; all of them include the US Dollar. If the USD is not one of the two currencies in the pair, it is not considered a major currency pair. Some currency pairs are more liquid than others, hence easier to trade. Below are the most popular currency pairs with the highest trading volume:
EUR/USD
USD/JPY
AUD/USD
GBP/USD
USD/CAD
Factors that move currencies
One of the key forces that moves both the stock market and the currency market is supply and demand. The bigger the demand for the US dollar, the bigger its value. For this reason, when there are multiple trading volumes, the price falls. Other factors that may affect currency prices include geopolitical tensions, interest rates, or financial news from the largest countries.
An investor can be successful in forex by speculating on the value of a currency going up or down. In order to have higher possibilities for successful trades in forex, you should always be aware that there are risks involved. What you actually do in currency trading is that you bet that the value of one currency will increase compared to another. All in all, currency trading is generally more profitable for active traders than passive investors. The former requires a hands-on approach whereas the latter involves less buying and selling.