The foreign exchange (forex) market involves the trading of currencies against one another, and due to sheer volume of daily trade, it is classed as the world’s largest financial market. In order to delve into forex trading, you should understand what currency pairs are, how they work, and how you can take advantage of the best ones for your trading strategy.
You can invest in the forex market through forward trades with an over the counter (OTC) contract, future contracts, which specific the amount of currency at a predetermined price in the future, or with contracts for difference, where the trade is based on the speculation of price movement without owning the underlying currency.
When forex trading on platforms like Plus500 where you partake in CFD trading, you can have access to the world’s leading currency pairs as well as the most commonly traded. In this article, we’ll explain where to begin when picking which currency pair to invest in.
Table of Contents
The first thing to know when forex trading is that currencies are traded in pairs, and are identified through codes created by the International Organization for Standardization (IOS). For example, the US dollar is represented as USD, which is a combination of its country’s code and a ‘D’ for dollar. Likewise, the Swiss franc is represented by CHF, with CH being code for Switzerland and an ‘F’ for franc.
Their value is determined by comparing one against the other, with first known as the base currency and the second classed as the quote currency. When investing in the forex market, you buy in the base currency and sell in the quote currency. So, taking our previous examples, in the forex pair USD/CHF, you’ll be buying in US dollars whilst selling in Swiss franc.
The currency pairs in the forex market are sorted into four categories: Majors, Minors, Crosses and Exotics. The least traded are Exotics, as these involve a less liquid currency from a small economy. For example, the Euro to Turkish Lira (EUR/TRY) or the USD to Mexican Peso (USD/MXN).
Forex pairs categorised as Crosses and Minors are those that do not involve the USD, but include other popular currencies from large economies, such as the EUR or the British Pound (GBP). As you can imagine, the most common Cross pair is the EUR/GBP.
The final and most commonly traded type of forex pair is Major, and these all include the USD, as it is classed as the world’s official Base currency amongst traders. When deciding the best currency pair for you, you should either trade in a Major forex pair, as these tend to be stable and more liquid, or use a currency pair involving your domestic money, as you’ll be more aware of the factors that will affect its value.
As aforementioned, when first branching out into the forex market, you should trade a popular Major forex pair, or your local currency against the USD. Once you’ve decided on the currency pair you wish to invest in, to discover if it is the best forex pair for your trading style, you should use a free demo account, usually provided by your chosen trading platform.
This reflects the real movement of the forex market, so you can examine the effects of your trading decisions, but without having to part with any capital. When taking the first step into forex trading with real money, you should still complete extensive research, begin with small trades and carefully observe how the market is performing over time.
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