Buying And Selling Foreign Exchange

 Buying And Selling Foreign Exchange

In the foreign exchange market the commodity you are buying and selling is money.  You purchase a foreign currency with the hope that the value of that currency will increase.  When you are a seller, you sit with the hope that the currency has decreased.  Like other commodities, the currency price is shown in the spot market, in quotes.  It is traded in pairs, such as the US dollar and the Euro.  This is displayed as USD/EUR.

Although you are purchasing the currency of another country, you are not actually buying a physical product, hence there is never an exchange of physical funds that takes place.  This is often very confusing for those who are new to the market.  This of it as buying shares in a particular country.  Your bet in this case is the success or failure of your chosen country’s economic climate.

Foreign Exchange Currency Quotes

Currency quotes are always in pairs, such as US/EUR which indicates the US dollar/Euro.  The value of one currency is calculated based on a comparison with another currency.  The currency that is shown first in a pair is the base currency, and the other currency is the quote currency.  The pair indicates how much you need of the quote currency to buy a single base currency unit.

An example for illustration is:

  • You are interested in the USD/EUR pair and you are quoted USD/EUR = 0.7000
  • You buy the pair which means that if you sell 0.70 Euros you will receive $1.
  • If you sell $1, you will receive 0.70 Euros.

Most Popular Pairs

There are seven most traded pairs globally.  There are retail traders who prefer to trade in the less popular pairs such as the Czech koruna, but the majority trade in the top seven.  The most popular pairs are:

  • GBP/USD which indicates the British Pound/US Dollar, also referred to as ‘cable’
  • EUR/USD which indicates the Euro/US Dollar, also referred to as ‘euro’
  • USD/JPY which indicates the US Dollar/Japanese Yen, also referred to as ‘gopher’
  • USD/CHF which indicates the US dollar/Swiss Franc, also referred to as ‘swissie’

The other three in the top seven are not as popular as the first four.

  • USD/CAD which indicates the US Dollar/Canadian Dollar, also referred to as ‘loonie’
  • NZD/USD which indicates the New Zealand Dollar/ US Dollar, also referred to as ‘kiwi’
  • AUD/USD which indicates the Australian Dollar/ US Dollar, also referred to as ‘aussie’

These particular pairs and combinations including the various combinations make up about 95% of all speculator trading in foreign exchange.  Bearing this in mind, there would only be 18 pairs that trade actively which makes this financial market narrower when compared to the broad base in the stock market.

If you are a newcomer to this financial market, most professional traders recommend that you commence trading with one of the most popular pairs, such as USD/EUR.  This should make your trades easier and provide you with higher odds to make a profit because of the volume of trades in these currency pairs.  The major currency pairs also experience much higher demand in the market.

 

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