How Forex Works
What is Traded in Forex?
The Forex Machine in a Nutshell
Unlike stocks you are not investing in any company but you are essentially investing in a country. The value of any given currency depends on the economic status of the country that it represents. Of course the EURO represents the economy of multiple countries but you get the idea. Currencies are valued against other currencies and this give you an exchange rate. This exchange rate is a reflection of the state of any given country’s economy vs another.
What is Traded in this Forex Machine?
If I were to list all of the currencies available to trade this would be a very long page. There are however a smaller group of 8 majors that will be more than enough for the average person. Once you gain experience with what you are doing you will be able to research the other uncommon and more volatile currencies. Just keep in mind that all you need to start trading are 2 of the below major currencies.
The Major Currencies
When working with currency symbols, which you will soon memorize, you can just remember that the first 2 letters of each symbol will represent the country and the last letter represents that country’s currency. If you look at the GBP for example; GB = Great Britain and P = Pound. If you look at the USD; US = United States and D = Dollar. An exception to that rule is of course the EUR as that symbol alone represents several countries and a currency.
How is Forex Actually Traded Then?
All currencies are traded in pairs and it is constant tug of war battle to see which currency is stronger than the other. You will be buying and selling these currencies through a Broker and using software that your chosen Broker gives you.
There is a massive variety of currency pairs that can be traded but there is no point in listing them all here. Just as you have the major currencies above, you also have major currency pairs. All of these majors have the USD involved as it is the World reserve currency. This group of currency pairs is the most frequently traded and most liquid of them all.
The Major Currency Pairs
Any of the major currencies can be traded in pairs but if it is not against the USD then each is just considered part of a minor currency pair. For the purpose of clarification I will list the GBP minor currency pairs and I won’t insult your intelligence by doing the same for each of the others.
The British Pound Minor Currency Pairs
If you apply all of that same logic to the other major currencies you will have all of the minor currency pairs laid out. As you can see though it ends up giving you way too many to deal with. You should always start with 1 major currency pair and add another after you have mastered the first. In fact there are even what are known as exotic currency pairs which expands the list even further. These would be crosses that contain no major currency pars at all.
One final note is on trading commodities; Gold, silver and oil are all also traded as pairs and the other half of the pair is always the USD. Those are the 3 major commodities that are traded but there are of course more if you want to explore.
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