How to Trade with Currencies Online
Currency trading is considered as the most robust and liquid market that the world has ever seen. Other markets can never compare to the remarkable value of such an extensively traded market. According to estimates, forex trading has a value of approximately $5 million a day, a number that easily outshine the value of the world’s entire stock market trading.
If you are planning to get a piece of the currency trading market, there are a few basics you should know how to trade with currencies online.
The Fundamentals of Currency Trading
When you trade currency pairs, you are basically selling one currency then buying the other. Here is a simple example to show you how it works. The EUR/USD is a currency pair that is often traded. USD represents US Dollar while EUR refers to Euro. In this currency pair, USD is the quote currency while EUR is the base currency.
The ratio is seen as just a single unit although this refers to two different currencies. Simply put, you are trading the currency pair of EUR/USD and not USD or EUR.
To further clarify this example basic currency trading, it is time to add several figures. Say, for instance, EUR/USD trades at 1.25345, it means that every €1 is equivalent to $1.25. It means that Euro is stronger compared to dollar or on the other hand, more dollars are required to buy euros.
Basic Currency Trading Terms
Major Currency Pair
There are 6 major currency pairs you will encounter in your day to day trades when trading currency pairs. These include EUR/USD, AUD/USD, USD/CAD, USD/JPY, USD/CHF and GBP/USD. These major currency pairs include a single major currency against US dollar.
It means that these currency pairs are the ones most actively traded in the world. They also provide the highest level of liquidity. As a result, they have lower volatility since considering the huge number of involved traders, the consensus on a particular price is harder and stronger to disrupt.
Minor Currency Pair
In contrast, minor pairs are the less traded currency pairs compared to the major currency pairs. These pairs are less liquid than those major currency pairs. Most of the time, they also have wider spreads. The general rule of thumb is that minor currency pairs are those pairs aside from the 6 major currency pairs mentioned above. There is a wide variety of minor currency pairs that you can trade depending on your goals.
Exotic Currency Pair
The exotic currency pairs usually include currencies from emerging market countries. These pairs are called as such since they don’t have anything to do with the country’s location and instead, it is about the additional challenges that are involved in trading the currency pairs. In general, these exotic currency pairs are illiquid with fewer market-makers and wider-spreads. Perfect examples of these exotic currency pairs are the Mexican Peso, the Hong Kong Dollar and the South African Rand.
If you are just a beginner, it is best to research first on how to trade currencies online to ensure that you will make the most out of this venture.
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