What are the best instruments for trading, and how to use them wisely? This is a popular question among novice traders, and we are here to clarify it. Let’s learn how to trade currency pairs and discover some foreign exchange market features.
The foreign exchange market is based on the principle of exchanging one currency for another. A currency pair is an essential instrument for trading in the Forex market. Two currencies and their ratio form it.
EUR/USD = 1.0224
GBP/USD = 1.1995
The first currency is called a base currency, and the second one is a quote currency. The first base currency in a pair is the one more expensive. For example, there is the GBP/USD pair and the USD/JPY pair. The British pound costs more than the U.S. dollar, and the Japanese yen costs less.
If some base currency depreciates and becomes cheaper than the quote currency, they don’t immediately swap. For instance, the EUR/USD pair has recently slid to about 0.9980. The currencies stayed in their places, with EUR as the base one.
The following formula calculates the exchange rate of a currency pair:
Exchange rate = one quote currency unit / one base currency unit
It would help if you remembered that the foreign exchange market is decentralized. It means that there is no central exchange where currency pairs are traded. The market itself sets the base rate.
For instance, the EUR/USD rate is 1.0224. It means that 1 EUR is equal to 1.0224 USD.
Most currency pairs consist of the US dollar as a quote currency. The USD is considered a world currency and is used for calculating the rate of other currencies.
The most popular currency pairs are:
These major currency pairs are the most traded in the world. Their daily trading volume is the biggest.
There are also minor currency pairs. Their market share is smaller than major currency pairs.
Some minor currency pairs include:
How to trade currency pairs?
The foreign exchange market works 24 hours a day. It means that you can trade currency pairs anytime you want. This might be especially attractive about foreign exchange trading, as the stock market trading sessions are limited by stock exchanges’ working hours and business days.
Before we explain how to open a foreign exchange position, there are some facts to consider.
Firstly, the size of one currency lot is 100,000 units. Units are always the base currency. For example, when you trade one lot of USD/JPY, your contract is 100,000 USD large. A lot of GBP/USD is 100,000 British pounds. You can always open a position with a fraction on a lot.
Secondly, mind the commissions. When you trade currencies, it is better to use intraday strategies — the reason for that is overnight fees called swaps. A swap is charged when you keep your foreign exchange position for the next day. The Specifications page of our website contains a description of these fees.
Open a position
Find the Market Watch panel in our web terminal and select the “Forex Majors” list. Then, choose a currency pair. We picked the GBP/USD as an example.
Choose the buy or sell type of deal. After you click one of these, a window appears.
Set the volume of your deal, then stop-loss and take-profit.
Congratulations! The deal is open.
Example of a position
Let’s take the GBP/USD pair as an example. The political environment in the UK has been unstable this summer, so the pound sterling spiked from 1.1188 to 1.2021 on July 18, when investors around the world were waiting for any hints about who would be the next Prime Minister. So, given that:
You set one lot (100,000 GBP)
The open price of your position is 1.1188
The close price is 1.2021 (+0.0833)
Your profit could have been $8330! This is a good profit for one position when no leverage is applied.
How to identify the trend
Some events predict currency exchange rates, so news analysis is worthwhile for trading decisions. For example, interest rate hikes make national currencies rise, or news related to political or military turmoil tends to drive national currencies downwards. We post news and quotes daily on our Telegram channel. Follow it to identify market trends in advance!
Another reliable source of trading ideas is Grand Capital’s technical analysis section of the website. Our finance experts make 4-5 trading ideas daily. Don’t hesitate to use it in your trading.