Trading Basics

Forex trading, short for foreign exchange trading, involves buying and selling currencies like the US dollar, Japanese yen, and euro. By speculating on currency movements, you can potentially make a profit.

How it Works

Imagine you're trading currency pairs, like USD/JPY (US dollar vs Japanese yen). If you think the dollar will rise against the yen, you can buy USD/JPY. If your prediction is correct, you can sell the currency pair later for a profit.

It's All Online

Unlike exchanging cash at a currency booth, forex trading happens electronically. You buy and sell currencies through a forex trading platform. Any profits you make are credited to your account, and you can withdraw them to your bank account.

Understanding the Basics: Currency Symbols

The forex market uses currency symbols for simplicity. So, USD represents the US dollar, JPY represents the Japanese yen, and EUR represents the euro.

The most commonly traded currencies are listed in the table below.

How Currency Pairs Work

Forex Trading: Buying and Selling Currency Pairs

Forex trading revolves around buying one currency and simultaneously selling another. These two currencies are quoted together as a currency pair, like USD/JPY (US dollar versus Japanese yen).

Imagine you're trading USD/JPY. You believe the US dollar will strengthen compared to the yen. So, you would buy USD/JPY, essentially buying US dollars and selling yen. If your prediction is on target, you can later sell USD/JPY for a profit.

Why Currency Pairs?

Think of the first currency in a pair (USD in our example) like a potato. To buy that potato, you need to pay with another currency (JPY). In forex trading, you're always exchanging currencies relative to each other.

The Three Categories of Currency Pairs

There are three main categories of currency pairs in the forex market:

• Major pairs: These are the most frequently traded pairs, usually including the US dollar (USD) like USD/JPY, EUR/USD (euro vs US dollar), and GBP/USD (British pound vs US dollar).Major currency pairs (majors) are traded most frequently, and they all contain the US dollar (USD).

• Minors: Minor currency pairs (crosses) don’t contain the USD. The most active ones contain EUR, JPY, and GBP. These involve less-traded currencies but still represent developed economies.

• Exotic pairs: These involve currencies from emerging economies or less-traded countries, often paired with a major currency like USD/TRY (US dollar vs Turkish lira) or EUR/MXN (euro vs Mexican peso). Exotic currency pairs contain one major currency as the base currency, paired with any non-major currency, such as South African rand, Mexican peso, or Danish krone. Exotic pairs are not so widely traded.