The Forex Exchange market is the largest market in the world. Many traders prefer this market for trading as it provides excellent liquidity, and also it is open 24 hours. However, many novice traders find it difficult to understand the buying and selling process in the Forex market.
The buying and selling process in this market is quite different from other markets like the stock market, commodity market, and the futures market. For example, the Stock market involves buying and selling of a company’s share, while the Forex market involves buying and selling of currency pairs. Note that you cannot trade only one currency at a time, but you will have to trade it as a pair.
Buying and Selling of Currency Pairs
In Forex, trading a currency basically means buying of one currency and simultaneously selling another currency. Therefore, we say in the Forex market we buy or sell currency pairs. For example, let’s say you want to buy the US dollar. To do that, you will have to buy the US dollar by selling some other currency. Now, you might be wondering which currency you should sell? Well, to buy the US dollar, you can sell any currency of your choice.
How to Make a Profit Trading Forex?
Continuing the above example, let’s say you know that the value of the US dollar is going to rise in the near future. So, you want to buy the US dollar by selling another currency. Well, selling any currency will not always fetch you a profit. There are two scenarios to this. Sometimes, even if the dollar index rises by value significantly, you might still be in no profit, or even in a loss.
On the contrary, even if the value of dollar increases by a small amount, sometimes, you will have made more profit than you would have expected. So, who do you think is controlling your profits? It is the other currency, which you sold to buy the US dollar, which is controlling the value of the US dollar, to an extent.
Therefore, to make a profit after buying the US dollar, you will have to pair it with another currency (selling currency) such that its future value will depreciate at the same time the US is appreciating. Consequently, when you choose such a pair, as the value of one currency increases, the value of the other currency automatically decreases. Hence, you will end up in a profit.
Different Types of Currency Pairs
Major Currency Pairs
Major currencies are the eight most traded currencies:
- U.S. Dollar (USD)
- European Euro (EUR)
- Japanese Yen (JPY)
- British Pound (GBP)
- Swiss Franc (CHF)
- Canadian Dollar (CAD)
- Australian (AUD)
- New Zealand Dollar (NZD)
The currency pairs that contain the US dollar (USD) on one side and one of the other major currencies on the other side are called Major currency pairs. They are called major because these pairs are most liquid and widely traded. The major currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF, NZD/USD, USD/CAD, and AUD/USD.
Here you would’ve observed that for some pairs, the USD is on the left and for some, it is on the right. Now, to buy the USD, you cannot execute the buy order on all the above currency. You can hit the buy on only those pairs where USD is on the left side. And, for the pairs where USD is on the right, you must place a sell order to buy the USD.
For example, to buy the USD, you need to either trigger the buy order for USD/CAD or trigger the sell order on EUR/USD. In both cases, you would’ve bought the USD.
Major Cross-Currency Pairs or Minor Currency Pairs
In simple terms, pairs that don’t contain USD are known as cross-currency pairs or minors. Some of the minor currency pairs are EUR/GBP, CAD/JPY, CHF/JPY, AUD/NZD, etc.
Exotic Currency Pairs
Exotic currency pairs are made up of one major currency and a currency an emerging economy, such as Hungary, Brazil or Mexico.
Other than the above currencies, Exotics can be made using G10 or BRICS currencies as well.
This completes the buying and selling concept in Forex. Now, to brush things up, you can take the quiz below.