What is Forex Trading? In What Form?
To engage in forex trading, you must first understand what forex trading actually is and in what form it is conducted. Today’s forex basics will revolve around these two questions for everyone to learn together:
1. What is Traded in Forex?
For physical business operators, trading might mean buying and selling goods in a "you pay money, I deliver goods" form of physical exchange. However, forex trading is different—its traded commodity is "money."
Buying a currency is like buying shares in a specific country, somewhat similar to buying a company’s stock. The price of a currency directly reflects the market’s judgment of a country’s current and future economic conditions.
When you buy Japanese yen, you are essentially investing a "share" in Japan’s economy. You are betting that Japan’s economy will perform well or even improve over time. Once you sell those "shares" back to the market, your hope is to profit from the trade.
Generally, the exchange rate between one country’s currency and another reflects the comparative economic conditions between the two countries.
After learning from forex tutorials, you’ll be eager to start working with currencies.
Major Currencies
Currency codes consist of three letters. The first two letters represent the country or region, and the third letter represents the currency.
2. The Form of Forex Trading
Forex trading refers to the simultaneous buying of one currency and selling of another. Currencies are traded in pairs through brokers or dealers, such as EUR/USD or GBP/JPY.
When you trade in the forex market, you are buying and selling currency pairs.
You can think of each currency pair as a "tug-of-war" between different currencies. Exchange rate fluctuations depend on the relative strength of each currency at any given moment.
Major Currency Pairs
The currency pairs listed below are called "major pairs" or "direct pairs." These pairs all include the US dollar (USD) and are the most frequently traded. They are the most liquid and widely traded currency pairs globally.
Major Cross Currency Pairs
Currency pairs that do not include the USD are called "cross pairs." The most actively traded cross pairs involve the three major currencies besides the USD: the euro (EUR), Japanese yen (JPY), and British pound (GBP).
Exotic Currency Pairs
Exotic currency pairs consist of one major currency and the currency of an emerging economy, such as Brazil, Mexico, or Hungary. The chart below shows some exotic pairs—can you guess which countries or regions these currency symbols represent?
Finally, a reminder to forex beginners: When you first enter the forex market, focus on trading major and cross currency pairs. Exotic pairs are not recommended for beginners because they typically have low liquidity and very high transaction costs, making them unsuitable for novice traders.
