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8. Which Is The Right Currency Pair To Buy & Sell?

Introduction

By now, we know that trading Forex market involves trading of currencies pairs rather than just a single currency. The working mechanism of this is quite different from that of the stock market. In the previous lessons, we learned how the buying and selling of a  currency pair work. However, this is still insufficient to take a trade on these currencies. Though you have the knowledge of which pair is strong or weak, choosing the right currency pair plays a vital role. There are times where you make a loss even if your analysis of the currency was correct. In this lesson, we shall try keeping you away from incurring these events.

Strength of the currency pairs

As discussed in the previous lessons, in a currency pair, we have something called as a base currency and a quote currency. To brush things up, the left currency on currency pair is called the base currency, and the one on the right is called the quote/counter currency. To trade the forex market successfully, one must do their analysis on both the currencies of the currency pair. For example, if you wish to trade the EURUSD currency pair, having knowledge in either EUR or USD is insufficient. Instead, you must have insights on both the currencies. This will not only prove the rightness of your analysis but will also reduce your risk considerably. Now, let us understand this in detail.

The answer to ‘why’ you must consider both currencies in a currency pair in your analysis rather than just one currency lies in the previous lessons. Well, when you go long/short on a currency pair, you are actually buying one currency and simultaneously selling the other one. So, if you analyze only one currency, you will be blindly be hitting a buy or sell on the other currency. Hence, it becomes equally important to consider the other currency in your analysis as well. For example, if you buy AUD/USD thinking that AUD is strong, there is no certainty that the prices of this pair will rise, as USD has its role to play as well.

Choosing the apt pair to trade

The answer to choosing the right currency pair is self-explanatory. It is always recommended to choose a currency pair where one of them is strong, and the other is equally weak. For example, let’s say in the USD/CHF pair, USD is strong, and CHF is weak. Ideally, one would buy a currency that is strong and would sell a currency pair that is weak. Coming to the case of USD/CHF, if you buy this currency pair, you are buying the USD and even selling CHF at the same time. Hence, you are basically doubling your success probability or halving your failure probability. If we were to visualize this currency pair, the USD would be shooting to the north while the CHF would be dropping towards the south. And in the form of a currency pair (where the base currency is taken into consideration), the chart would visually look in one direction, which is upward.

Apart from strong vs. weak pairs, you can even trade strong/weak vs. neutral pairs as well. But, note that it is highly risky to trade a strong vs. strong or weak vs. weak as the overall direction of the market becomes hard to predict. We hope you understood this concept. Now, let’s take a quick quiz.

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7. How Does Profit & Loss Take Place When You Are Trading in Forex?

Introduction

Forex is that market where buying and selling of currency pairs take place. Unlike the stock market, where you need to consider only one stock to analyze, in the forex market, you will have to examine two different currencies to trade one instrument, as instruments here are traded in pairs. Hence, the correlation between currencies plays a major role while trading a currency pair.

Understanding the Current Market Price (CMP)

The current market price (exchange rate) of a currency pair tells you the number of units of the quote currency you’re required to pay to buy one unit of the base currency. For example, let’s say the exchange rate of EURUSD is 1.1000. Here, to buy one unit of EUR, you will have to pay 1.1000 USD. So, basically, while trading a currency pair, you are buying one currency and simultaneously selling the other currency.

Extracting money from the Forex market

Our purpose in this market is to make money. And to make money (profit), understanding the relationship between the two currencies in a currency pair becomes vital. Now coming to the objective, a trader must buy a currency pair when they expect the base currency to have more potential to show strength in the future, comparative to the quote currency. Or in simple terms, to make a profit from a trade, you must go long on the currency pair when you think the base currency will increase in value relative to the quote currency. (Going ‘long’ in Forex is nothing but buying the currency pair and going ‘short’ is nothing but selling it)

Complete trade example

For instance, the CMP of USD/CAD as 1.3240. And let’s say you believe that the USD/CAD is going to drop in the near future. So, you wish to short sell this currency pair. Consider your short sold 10,000 units of USD/CAD. Here, by selling this pair, you have internally sold 10,000 US Dollars and bought the equivalent Canadian Dollars (10,000 USD * 1.3240 = 13,240 CAD). After some days, you see that the prices have dropped to 1.3180. Now, since the value of this currency pair has changed, the 10,000 US Dollars in CAD will be turn out to be, 10,000 USD * 1.3180 = 13,180 CAD. Now, when you sell this currency pair at the CMP, you will actually be buying 10,000 USD and selling 13,180 CAD.

In the above example, let us see if you made a profit or a loss. Initially, you had sold 10,000 USD to buy 13,240 CAD. At this point, you are sitting with 13,240 CAD. Later, you bought back that 10,000 USD, and you paid (sold) just 13,180 for it. That is, you are still left with 60 CAD (13,240 – 13,180) with you.

Hence, you made a profit of 60 CAD ( which is ~45 USD).

Quick cheat sheet

When you buy a currency pair (buy – base currency, sell – quote currency), you need the price of the currency pair to appreciate in value.

Conversely, when you sell a currency pair (sell – base currency, buy – quote currency), you need the price of the currency pair to depreciate in value.

Now let’s check if you understood the concepts right by answering the below questions.

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6. Different Ways Of Trading The Forex Market

Introduction

Forex is a market to trade foreign currencies. It is traded 24 hours electronically over-the-counter, meaning the transactions are performed over the networks around the world. One way to trade the forex market is for one party to buy a currency, and the other to sell it. This method is referred to as spot forex trading. Apart from this, there are other ways to trade the Forex market. And in this lesson, we shall discuss these different ways.

Forex market and its types

If we were to consider the primary forex market asset types, we could find four. They are:

Spot Forex Market

Currency Futures

Currency Options

Currency Exchange-traded funds

Now, let us explain the working of each one of them in detail.

Spot Forex Market

As discussed, in the spot forex market, currencies are bought and sold for a short period of time, based on the current market price (CMP). The prices in this market are settled in cash, on the spot, bases on CMP. Hence, the spot market is also called a ‘cash market’ and ‘physical market.’ The settlement of orders in the spot market takes two days, while in the futures market, it takes much longer.

Spot trading is the most popular form of trading where the majority of the retail traders trade on. There is great liquidity in this market, and brokers even offer tight spreads on them. Apart from retail traders, other participants in this market include commercial banks, central banks, arbitrageurs, and speculators.

Currency futures market

In the currency futures market, the buyer buys a contract of one currency by paying another currency. While the seller of the contract holds the opposite obligation. And this obligation is due on the expiration date of the future. The ratio of the currencies is settled in advance between both the parties (the time when the contract is made). The parties make a profit or a loss depending on the difference between the real effective price on the date of expiry and the settled price.

Currency Options

A currency option is a type of options contract that gives the buyer the right, but not the obligation, to buy or sell a currency pair at a given price before a set time of expiry. To get this right, the holder of the option pays a premium to the seller who is known as an option seller.

There are two types of currency options, ‘Call option’ and ‘Put option.’ A call option gives the buyer the right to buy a currency pair at the strike price before the expiry date. A put option gives a buyer the right to sell a currency pair at the strike price before the expiry date. Currency options are a popular way of protecting against loss.

Since the options are a bit complex, let’s understand them with an example. If you believe that the price of the Euro will rise against the US dollar, you can buy a currency call with a strike price of 1.31000 and expiry at the end of the month. If the price of EUR/USD is below 1.31000 on the expiration day, the option expires worthless, and you would lose the premium paid. On the other hand, if EUR/USD increases to 1.50000, you can exercise the option and buy the currency for 1.31000 (At strike price). By doing this, you have generated high returns on your investment by using options.

Currency exchange-traded funds

Back then, Exchange-traded funds (ETFs) were only available for the stock market. But in the present, ETFs have expanded to the Forex market as well.

A currency ETF is a fund that clubs a single or typically a bunch of currency pairs. These funds are managed by financial institutions and are offered to the public for purchase on an exchange board. Hence, one can trade ETFs just like any share on the stock market.

These are the four primary ways of trading the Forex market. Now take the quick quiz below to know if you have understood the above concepts.

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5. How Large & Liquid Is The Forex Market?

When compared to other markets like the stock and commodity market, the foreign exchange market is the largest in the world in terms of size and liquidity. In this lesson, we shall go over some insights on the size and liquidity of the forex market.

Where is the Forex market headquartered?

The stock markets across the world have different central exchanges where all the transactions are processed. But, in the case of the forex market, there is no central exchange (physical counter) where the transactions can be processed. In fact, this market runs electronically, connected by a network of banks. This, in short, is called an interbank market or an over-the-counter (OTC) market. Hence, this enables traders to trade in the forex market from anywhere in the world. Also, this is one of the reasons for its high volume of trading.

Forex market’s volume

The amount of money traded in the forex market is humongous. Being the most traded market, the value of it reaches up to $3 trillion. The number is made up of all the types of transactions performed in the market. The amount of different transactions is listed as follows:

$1,005 billion comes from spot transactions

$1,714 billion is added from forex swaps

$362 billion accounts for outright forwards

$129 billion for estimated gaps

Currency distribution in the Forex market

There are about seven currencies on which most transactions take place. Out of these currencies, the US Dollar dominates with around 85% of all the operations in the forex market. Next up in the line stands EUR, which is then followed by JPY and GBP. A graphical representation for the same is given below.

Here, the sum of all the variables totals to 200%, as currencies are traded in pairs.

What are the Foreign Exchange Reserves?

They are the assets that comprise banknotes, bonds, deposits, etc. The central bank of a country holds these with two primary purposes. One to maintain the balance payments of a country and the second is to control the confidence in financial markets. These reserves can be held in more than one currency.

According to the International Monetary Fund (IMF), 64% of the world’s forex reserves are made up of the US Dollar. And after USD comes GBP, JPY, and EUR comprising of 4%, 4%, and 2% of the world’s FX reserves, respectively.

Liquidity of the Forex market

Liquidity is simply the possibility to square off a position smooth and quick without causing the market to make a drastic move. In simple terms, liquidity is the level of supply and demand in the market. So, when there are large numbers of buyers and sellers in the market, we can call this market to be highly liquid.

With respect to the Forex market, it is the most liquid market in the world. This implies that the forex market constitutes a large number of participants (buyers and sellers). With high liquidity, one can liquidate their positions much faster and at their quoted price. Moreover, high liquidity causes the prices to move smoothly, gradually, and in small steps. Hence, this even leads to more consistency in the quoting of prices.

Below is the chart of EUR/USD on the 5-minute timeframe. We can see that the prices move smoothly in spite of being in a small timeframe.

Below is the chart of a small-cap stock in the US. Here, we can see that the prices are not moving in a flow, and there are gaps between the prices. And this is solely due to the lack of liquidity in the market.

That’s about the liquidity of the Forex market. We hope you had a good read. Check your learnings by answering the below quiz.

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4 – Understanding The Mechanism In Buying And Selling Of Currency Pairs

Introduction

The mechanism of the forex market is quite different when compared with other markets like stocks and commodities. In the stock market, we essentially consider a company’s stock to trade. But in the foreign exchange market, we cannot trade a single currency. Instead, we must trade them in pairs.

In the previous lessons, we understood the meaning of base and quote currencies and also the right way to read the symbols. In this lesson, let’s explain how exactly this buying and selling happens in the Forex market.

The working principle

Before getting into the topic, let us understand a few common terms to grip the concept much better.

Long – It is a basic term in trading, which refers to the ‘buying of security.

Short Selling – This term refers to the ‘borrowing’ of security from the broker and selling it at the current market price. You can assume this to be the right opposite of long. Note that Shorting security and selling security are two different terms.

For example, let’s say you went long on a security, and now you wish to close it. To close it, you will have to ‘sell’ it. Here, you are ‘selling’ and not ‘shorting’ the security.

Now, with this on our back, let us get into the working of buying and selling currency pairs.

Going Long on a Currency Pair

When you go long on a currency pair, you actually buy the base currency, and short sell the quote currency. For example, if you go long 100,000 units on EUR/USD, you are buying 100,000 Euros and short selling 100,000 US Dollars.

Short Selling a Currency Pair

Short selling in the forex market is quite different from that of the stock market. In the forex market, when you short sell a currency pair, you will be selling the base currency and buying the quote currency. Hence, shorting in forex is the same as placing a regular sell order.

However, the main motive remains that the prices must decline from the point you executed the short position to generate a profit. For example, if you short 10,000 units of USD/CAD, you are actually selling 10,000 US Dollars and buying the same number of Canadian Dollars. Hence, here, you’re not borrowing a certain amount of currency to go short.

What next?

With the concept of the long and short sell, let us understand how to make a profit from it.

To profit from a long trade, you need the currency pair prices to increase.

To profit from a short trade, you need the currency pair prices to decline.

This also implies that, in a long trade, an increase in the base currency prices will put you in profit, and in a short trade, a decrease in the base currency prices will give you profits.

Example

Consider the current market price of USD/CHF to be 0.9850. Let’s say you went long on this currency pair. The buy/sell mechanism here is simple – you bought the USD (the base currency) and simultaneously short sold the CHF (the quote currency). Hence, to make a profit from this, you need currency pair prices to increase, which in turn means that you need the value of the base currency (USD) to increase or the value of the CHF to decrease because you’ve bought the USD.

This is how the buying and selling of currency pairs work internally. However, since all of this is managed by the broker, all you need to know is if the prices should rise or fall according to the position you took.

In the next article, we will be discussing the sheer size and liquidity of the Forex market along with the perks involved. For now, check if you can get the below questions right.

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3 – Reading & Understanding The Currency Pairs

Introduction 

From the previous lesson, we know that global currencies are traded in the Forex market. These currencies are exchanged in pairs. We also understood what Major, Minor, and Exotic pairs are. In this lesson, let’s discuss more characteristics of these currency pairs.

Out of the three types of currency pairs, the most traded type are Majors. These major pairs contribute more than 85% of the total Forex trading volume. Prices in these pairs move in tighter spreads, but they are a bit volatile during market opening hours. Major pairs are those who have USD in them. Some of the major pairs are EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The other vital pairings which do not include the US dollar are known as ‘cross currencies.’ Some of these are GBP/EUR, EUR/CHF, EUR/JPY, etc.

Reading a Currency Pair

Since we are talking about currency pairs and the Forex market, it is essential to learn how to read them. Every currency has a three-letter symbol defined by the International Organization for Standardization(ISO), which is straight forward. Below is the terminology for some of the major currencies.

  • British Pound for GBP
  • US dollar for USD
  • Japanese Yen for JPY
  • Swiss Franc for CHF
  • Euro for EUR

To understand the reading of a currency pair, you need to know the meaning of base and quote currencies. The first currency in a Forex pair is called base currency, and the second one is called quote currency. As we know, trading the Forex market involves selling one currency to buy the other. For instance, we sell the base currency to buy the quote currency. Let’s say you are trading USD/CAD. USD is your base currency, and CAD is your quote currency. Here, when we are executing a sell trade on this pair, we are primarily selling USD to buy CAD. And vice-versa if you are placing a buy trade.

How much one unit of the base currency is worth against the quote currency defines the price of a pair. In the above example, if USD/CAD is trading at 1.32267, that means one US dollar is worth 1.32267 Canadian dollars.

Liquidity of Major Pairs

Liquidity in these pairs is the highest when compared to other pairs. The larger the import/export value between two nations, the more liquid the currency pair of these countries will become. EUR/USD is the most liquid pair in the world. Major currency pairs should not be confused as the best currency pairs to trade. Trading a particular currency pair depends more on strategy and market sessions. When we say ‘major,’ we mean the most actively-traded Forex pair. The six most actively-traded Forex pairs are:

  • EUR/USD
  • USD/JPY
  • GBP/USD
  • USD/CAD
  • USD/CHF
  • AUD/USD

One of the reasons behind these currencies being traded so extensively is the political and economic stability associated with these currencies. Big investors feel it is safe to park their money in such economies.

What Should You Trade?

If a currency pair has high liquidity, the volatility of that pair decreases. Currency pairs that are linked with the market openings should be our first choice. For example, it is recommended to trade the US dollar during New York open or trading the Australian dollar during Asia opening, as there will be good volatility during this time. Also, consider economic news releases, technical chart analysis, and other events while choosing the currency pair to trade. For people who have just begun their Forex trading journey, it is recommended to start trading major currency pairs before experimenting with minors and exotics. Now try answering the below questions.

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2 – Preface To The Forex Market

Introduction

Forex AKA Foreign exchange is the largest market in the world where all the global currencies are traded. It can also be considered as a place where individuals, companies, and banks convert one currency into another. The entire Forex market is decentralized and is maintained by the banks across the globe. On average, the daily trading volume of the whole Forex market is more than $5 trillion. This explains the sheer size and liquidity of this market. Forex market is an essential part of the global economy and is active 24/5 (From Monday to Friday)

The Purpose

Typically, the exchange of goods and services happens for money, and this money is nothing but currency. The respective country’s governments determine the value of that currency. Hence the value of one country’s currency is never equal to that of another. This is the reason why we need foreign exchange to exchange one country’s currency to others. Forex market is essential for any of the global imports/exports to happen, for any employer who needs to pay salaries to their overseas employees, for a tourist who is traveling abroad, etc.

Forex trading

It refers to the buying and selling of currencies that belong to different countries. In Forex trading, the buying and selling of currencies happen at the same time. That is, if a trader is trading EURUSD pair, he/she is essentially selling the USD he has in order to buy Euros. Traders make a profit when they sell a currency at a higher price than the cost they paid to buy that particular currency. This entire process was complicated even a decade ago. But now, with the advent of technology, anyone can start trading by using a lot of online trading systems.

Currency Pairs

As discussed above, the buying and selling of currencies happen in pairs. There are three types of Forex currency pairs. They are Majors, Minors, and Exotics.

Major currency pairs are those where the USD is involved. These are the most frequently traded pairs in the market, and they make up to ~85% of the Forex transactions that happen in a day.

Examples: EUR/USD, USD/JPY, GBP/USD etc.

Minor currency pairs are those that don’t contain USD. They are also known as cross pairs. Euro, Pound, and Yen are the most popular currencies that make up the minor currency pairs.

Examples: EUR/CHF, AUD/JPY, GBP/CAD etc.

Exotic pairs are the ones where one is a major currency, and the other is a small or emerging currency.

Examples: USD/PLN, GBP/MXN, EUR/CZK etc.

Types of Forex markets

Spot market – The physical exchange of the currency pair takes place at the point of trade, i.e., as soon as the price is fixed between buyer and seller. The transaction is settled on the spot or at least within a short period of time.

Forward market – Here, a contract is made between the buyer and seller, where they agree upon a price to exchange the currency pair. This contract will be settled at a date in the future or within a range of future dates.

Futures market – Even in this type of market, a contract is fixed between the buyer and seller. A price is set on a future date delivery. The difference between Forward and Futures market is that in the latter, the contract is legally bonded between the parties.

That’s about the introduction to the Forex market. We hope you had a good read. In the next article, we will talk about some important Forex terms and phrases. Now, let’s see if you can get the below questions right.

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Introduction To The ‘Ultimate Forex Course’ By The Forex Academy!

At Forex Academy, we give utmost importance to education. To be successful, you need to learn before you Earn. So for that same purpose, we have designed a proprietory course helped by industry experts. This extensive course will cover almost everything one needs to know about the Forex market. All relevant aspects of the trading business will be discussed here, starting right from the fundaments to the advanced trading concepts. We will be publishing one article per day so that it will be a continuous learning process. And guess what? The curse is entirely free for our readers.

Introduction To The Course

In this one-of-a-kind course, we will explain everything you need to know about Forex trading. The Forex market has evolved rapidly in recent times. It is not the same that you would have seen or heard a decade ago. The fundamentals are changing, psychology is changing, and complexity has increased. Technology not available in the 90s has now become robust and is being used extensively by traders and banks. As retail traders, we should prepare as best as possible to meet these global changes.

We have created this course, keeping in mind the rapid changes happening in the forex market. You need to use a structural method of learning, which is what we have done. Education shouldn’t be in bits and pieces, this will only create confusion, and you cannot gain anything from that knowledge. You will gain an insight into fundamental and technical expertise and how you can use them together to make the best trades. We have compiled this information from the best sources. Most importantly, the course contents have been written based on the personal experience of the writers. Forex.Academy is the right place to start for any person looking to start his trading career.

Why should you take up this course?

If you want to achieve your investment goals, this course is for you. Trading is not an easy game. It requires a lot of hard work and dedication. This journey begins with learning, and learning starts here. This course is a complete package for all the aspiring traders. Also, experienced traders who are willing to expand their knowledge must try this course. The articles are more reader-friendly, where topics are explained in simple language. The most complex strategies are described in the easiest way possible. Without having the right knowledge, it is impossible to succeed in trading.

Structure of the course

The course is divided into 37 chapters which comprise of 350+ articles, where a wide range of topics are covered. The chronological order of topics is in such a manner that every chapter is linked to the next. We have made sure that it does not lead to confusion at any point. You will find information on fundamentals, technical analysis, and price action. Market psychology is one such topic, which has been written with a lot of attention. And you too, should follow these principles to gain control over your mind.

Keep track of your learning with the quizzes

At the end of each article, we have included a quiz that will test your understanding of the topic. To be confident about what you have read, try to answer all of them correctly. If you are unable to answer, that means you need to reread the article. Rereading the article will clear all your doubts and make you an expert. Once you got all the answers right, you are ready to go ahead to the next section.

What will you learn by the end of this course?

By the time you reach the end of the course, you will be halfway through your trading journey. The only thing left for you to do is to practice the trading strategies discussed along the course. You will have all the knowledge you need to be a successful trader. See you on the course.

All the best! Happy Learning!