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

Currency pairings

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.

forex1

[Image source: highend.eforexsignaling.com]

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 Dollar

Us Dollar

[Image source: Wikipedia]

Like 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

Spot Markets

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.

Futures

These are contracts to buy or sell a certain amount of assets at a fixed price at a future date.

Options

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.

Next Lesson: No 3 The structure of forex trading 

Buy our online Course & Support programme (iMarkets Live)

Share this post