The currency market attracts people of all kinds. One might wonder about what is traded here. Well, the answer is quite simple: its money. The contract for differences means that one currency is being purchased while another one is simultaneously being sold. That is why all currencies are being traded in pairs. An example is the GBP/USD (British pound/American dollar) pair.
There are a lot of reasons why people have an interest in this kind of trading. Some of them include high profits and no need to leave your house to work. A trader can stay at home and do everything on his computer. You can learn currency trading online or get the skills by practicing with low sums. It all depends on you. Now let us talk about currency trading.
Currency trading: how does this work
In currency trading, there are some specifics newcomers have to understand at once. The first thing includes the way this system works.
Any traded pair consists of two details: the “base” and the “counter” currency. Base currencies are located on the left side of the pair, while counter currencies are situated on the right side.
The counter shows the trader the sum that is paid for purchasing a unit of the base currency. If it is the counter that is being bought, then everything works vice-versa. So, in the opposite situation, the counter will represent the sum a trader will receive for conducting a successful trade.
Here is a small example for having a better understanding. If the EUR/USD quote is 1.15, this means that at this specific time, the value of 1 Euro, which is the base currency in the trade, costs 1.15 in United States Dollars, which are used as the counter currency here. Almost every currency market shows the bid and asks positions at once for any pair. Thanks to this, trading gets a bit more time-efficient and becomes easier for newcomers.
Currency Trading Terminology
A bid, an ask, and a spread
The first term we are going to talk about is a “bid.” As a rule, it has a value that is always lower than an ask, and it shows the price a broker pays for purchasing the base currency and exchange it for the counter currency. In a nutshell, this is the price traders set to sell.
Next goes an “ask.” It always has a higher value than a bid. Bids show prices brokers are ready to sell base currencies in exchange for counter currencies. It also is the price at which traders make purchases.
Next goes a “spread.” This is what traders use to name the difference between a bid and an ask. In this specific field, a spread is used to represent the price for opening a new trade.
Let us imagine a position in the currency market. This will help to get a better understanding of how all this works. We have a USD/JPY pair that represents the US dollar (base) and the Japanese yen (counter). The bid value is 100,34. The ask value is 100,40. The spread is six pips, which means that this is the price that has to be paid for opening a new transaction. In this situation, we shall imagine that the lot size is standard. This will mean that opening a USD/JPY transaction will cost you $60, as at a standard lot, one pip is $10.
A recommendation for all traders: do not forget about the spread! As these transactions are your profits, you must always calculate the money you need to pay. Spreads are something that ever changes, that is why our advice is to trade currencies only when the spread reaches a minimum value.
Currency Market: What is Traded Here?
The world has 180 currencies. Can you imagine that? What’s more, all of them can be found in modern online currency markets! Of course, not all of them are profitable, but even one thought about these possibilities makes it more interesting.
It is important to note that there are three main types of pairs. These are:
- Major pairs.
It is quite easy to guess what stands behind the name “major currency.” Majors include the most popular currencies in the world, such as the American dollar or Euro. All other currencies are located in different group categories.
The reason for the popularity of significant pairs is the high volume and liquidity they have. But the best addition to this is the possibility of online trading with profits. Have you tried that already? Register on our website and give it a shot!
Major currency pairs include only seven positions. In a nutshell, any pair with the USD is considered to be a major. Now, after seeing such pairs on the currency market, you can be proud of yourself for distinguishing them from other pair groups. It won’t give you a big advantage, but the knowledge about the profitability of these pairs will surely get your attention.
Major pairs are prevalent among traders on the market for two things: their volatility and liquidity. This gives the possibility to “play” on the price. The great thing about these two things is that they provide the currency pairs low spreads. Although the price movement is quite active, the transaction value is mostly low, meaning that profits can still be made. You might also notice the usage of the American dollar in every pair. It is not necessary to explain why. Everyone has heard of this dollar, and it is used almost in every part of the globe.
- Minor pairs.
Minor currency pairs have their idea in the name. Being minors means having lower liquidity rates and a smaller interest from traders. Any currency pair that does not include the US dollar can be considered as a minor pair. Minor pairs other names, for example, cross-currency pairs. The spreads here are usually higher than those of the major pairs, so there has to be a higher payment for opening a transaction. Minors include such pairs as the GBP/AUD, CAD/JPY, and others.
- Exotic pairs.
Currencies of emerging countries are called exotic. Developing countries are, for example, Mexico, Turkey, South Africa, Russia, and others. The currencies from these countries are noted to have high liquidity, few market makers, and extensive spreads.
Now you know something about currency trading and the currency market. How about opening an account with Maxitrade and using your knowledge to make high profits?
Efficient currency trading
As everyone already knows, in currency trading profits are made from any price movement. So, there are only two options here:
- Going long.
- Going short.
In the first case, the base is bought, and the counter is sold. The second option does everything vice-versa by buying the counter and selling the base.
Let us have an example of long currency trade. If we choose this option, the exchange rate that we have now is expected to grow. The pair will be EUR/USD with a quote of 1.15. If everything goes fine and the quote grows till 1.1550, in a standard lot, the profit of a trader will equal $500, as the value has grown for 50 pips, and we remember that one pip in a standard lot is $10. Losses are possible too, as if the quote becomes 1.1480, meaning that it has fallen for 20 pips, $200 will be lost.
Traders can use falls to their advantage and make them profitable. This is when short trades come in. In this situation, the quote fall till 1.450 will bring a $500 profit, and a quote rise till 1.550 will bring a $500 loss. See, it’s that simple.
The determination of the trade that has to be opened requires some fundamental and technical analysis of the currencies that must be traded. In a nutshell, fundamental analysis is used to explain which currencies must be traded, while technical analysis will help the trader determine when should the trade be conducted.
Currency pairs fundamental analysis
This kind of analysis involves:
- economic;
- social;
- political factors.
These are the greatest factors with the greatest influence that impact any countries national currency’s value. The impact includes growth, inflation, the overall economic picture of the country. It is not necessary to be a professional in economic to be able to analyze the market this way. You need to understand the key factors you need to pay attention to and always try to develop your understanding of the way the market works.
Fundamental analysts usually understand the reasons for the price movements, and it does not matter whether they are expected or not. This kind of analysis allows determining long term trends, which allow traders to find the best moment for the best profits.
If any severe news about a specific currency suddenly appears online, massive price movements are usually triggered. The right way of tracking such events in the future is using the economic calendar. It can be found online or in a separate section on our website.
Currency pairs technical analysis
Almost all technical analysts are sure in one thing – history repeats itself. They analyze the historical data of various markets and in this way, make conclusions about possible future value movements. They use different patterns that allow them to create signals. Meaning that when a similar situation occurs, they can be sure that there will be the same result. So, what technical analysts do is continually watching the prices.
There are various trading charts that different brokers use. The most popular include candlestick, line, and tick charts. Another addition to this is the usage of trading indicators or signals that make it all easier. For example, these can include trend, volatility, volume, market cycle indicators, and a lot of other detailed patterns. All these are used to determine the move to get the highest profits.
Maxitrade gives its traders the best tools and indicators so that making profits could be as easy and simple as possible.
Conclusion
We have had a look at the way the currency market works, what are base and counter currencies, how to calculate profits, three base terms including a bid, a spread, and an ask, three main types of pairs, and two types of analysis. This article gathers the basics for all traders who want to start earning money on currency trading online.
