Lesson 2: Common Currencies
The most common currencies used in Forex trading are:
Country Currency 3 letter symbol
USA US Dollar USD
United Kingdom of GB Pound Sterling GBP
Euro Zone members Euro EUR
Japan Yen JPY
Australia Australian Dollar AUS
Canada Canadian Dollar CAD
Switzerland Swiss Franc CHF
New Zealand New Zealand Dollar NZD
Currencies are paired together, e.g. GBP/USD is the Great British Pound and the US Dollar EUR/JPY is the Euro and the Japanese Yen.The exchange rates between all these currencies are constantly fluctuating due to the strength of each economy against the other. Like in a constant tug of war the position of the rope is changing constantly due to the strength of each opponent. These fluctuations in exchange rates are what traders seek to exploit in order to make their money. Many transactions are made on speculation, putting money on whether the exchange rate will go up or down. The ease of which transactions can be made on forex means that there is always a high liquidity, which means the amount of people buying and selling currency at any particular time. This makes the exchange rates between two currencies fluctuate constantly.
The Importance of the US DollarLike it or not the US Dollar is the most commonly traded currency in the forex stock exchange. Well over half the transactions which take place on Forex include the US dollar as one side of the pairing. Moreover it is the reserve currency for the whole world and the only currency used in the lucrative oil trade. Every other country must convert their own currencies into US Dollars in order to trade in oil, increasing its power in the world economy.
Ways of trading in Forex
This is the simplest and most common way of trading. The trader takes two currencies and monitors the constant exchange rate between them. They buy or sell one of these accordingly to make a profit.
These are contracts to buy or sell a certain amount of assets at a fixed price at a future date.
Options are the opportunity to buy or sell assets on a certain expiration date. These can be traded both on Forex or the normal stock exchanges.
Exchange Traded Funds
This is a combination of stock and currency, which can be traded on both Forex and normal stock exchanges.