To succeed in forex trading, you need to understand the Nitti gritty of the forex exchange. Although most of the trading is done by the forex broker white label who give access to the trading platform or provide liquidity, there is no harm of knowing what happens in the market.
In foreign exchange trading, two currencies determine the market value: a base currency and a quote currency. The base currency is the first currency, which is listed in a forex pair. The second currency is the quote currency. The two currencies determine the prices in online trading platform.
How Is Forex Trading Done?
Forex trading involves selling one currency to buy another. The currencies are usually quoted in pairs; the base currency and quote currency. The price of the forex pair is how much one unit of the base is worth in the quote currency.
The currency in the pair is listed in a three-letter code where the first two letters stand for the region while the third letter stands for the currency itself. For example, GBP is for the Great British pound, and USD stands for the US Dollar. If the GP is the base, and the USD is the quote currency, it will be listed as GBP/USD. If this pair is trading at 1.35361, then one pound is worth 1.35361 dollars.
During the trade, if the pound rises against the dollar, then one pound will be worth more dollars, and the price of the pair will go up. If it drops, the price of the pair will decrease. As a forex trader, you should predict when the pair is likely to increase or decrease. If the pair strengthens against the quote currency, then you can buy the pair a process known as going long. If you predict that the pair will weaken, then you can sell it in a process known as going short.
How Are These Pairs Classified?
To keep things ordered in forex trading, the providers classify the pairs in the following categories:
1. Major Pairs
Eighty percent of global forex trading is made up of the seven currencies classified as the major pairs. These pairs move the forex market, and they include EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, and AUD/USD.
2. Minor Pairs
These are less frequently traded pairs that often feature significant currencies against each other instead of the US Dollar. They are; EUR/GBP, EUR/CHF, AND GBP/JPY.
3. Exotics
The exotic pair consists of a significant currency against one from a small emerging economy like Polish Zloty and Mexican peso. The pairs may appear as USD/ PLN or EUR/CZK.
4. Regional Pairs
These pairs are classified by regions, for example, Scandinavia or Australasia. They include EUR/NOK (Euro against Norwegian krona), AUD/ NZD (Australian dollar against New Zealand dollar.
What Moves The Forex Market?
Since the forex market is made up of currencies from all over the world, it is difficult to predict the exchange rates. The forces of supply and demand determine the price movements of the forex. The following influences affect the price fluctuations;
Central Banks
The supply is controlled by central banks that have the mandate of announcing measures that affect the currency price. If more money is injected into the economy, the price of the currency drops.
News Report
When positive news of a particular region hits the market, commercial banks and other investors will want to invest in them, thus increasing the demand for that region’s currency. On the other hand, negative news can cause investment to decrease, thus lowering the currency’s price. The strength of the currencies reflects the reported economic health of their region.
Economic Data
The economic data influences the currencies’ price movements by indicating how an economy is performing and offering an insight into what the central bank is likely to do. If the central bank of a given region is likely to increase the interest rates to beat inflation, traders may invest in the currencies to anticipate the rates going up.