There are three different ways to trade forex, which will accommodate traders with varying goals: Similar to stock traders, forex traders are attempting to buy currencies whose values they think will increase relative to other currencies or to get rid of currencies whose purchasing power they anticipate will decrease. Most forex trades aren’t made for the purpose of exchanging currencies (as you might at a currency exchange while traveling) but rather to speculate about future price movements, much like you would with stock trading. For example, USD to EUR conversions are listed as EUR/USD, but not USD/EUR. dollars) and conversely, if the exchange rate falls, that means the base currency has fallen in value.Ī quick note: Currency pairs are usually presented with the base currency first and the quote currency second, though there’s historical convention for how some currency pairs are expressed. When the exchange rate rises, that means the base currency has risen in value relative to the quote currency (because €1 will buy more U.S.If the EUR/USD exchange rate is 1.2, that means €1 will buy $1.20 (or, put another way, it will cost $1.20 to buy €1).As a result, the base currency is always expressed as 1 unit while the quote currency varies based on the current market and how much is needed to buy 1 unit of the base currency. The exchange rate represents how much of the quote currency is needed to buy 1 unit of the base currency.The currency on the left (the euro) is the base currency.
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Here’s how to interpret that information, using EUR/USD-or the euro-to-dollar exchange rate-as an example: The following seven currency pairs-what are known as the majors-account for about 75% of trading in the forex market:Įach currency pair represents the current exchange rate for the two currencies. Other major currencies, in order of popularity, are: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF) and the New Zealand dollar (NZD).Īll forex trading is expressed as a combination of the two currencies being exchanged. The second most popular currency in the forex market is the euro, the currency accepted in 19 countries in the European Union (code: EUR). dollar is involved in a vast majority of forex trading, so it’s especially helpful to know its code: USD. While there are more than 170 currencies worldwide, the U.S.
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How Currencies Are TradedĪll currencies are assigned a three-letter code much like a stock’s ticker symbol. Meanwhile, an American company with European operations could use the forex market as a hedge in the event the euro weakens, meaning the value of their income earned there falls. dollars (and sell euros), for example, if she believes the dollar will strengthen in value and therefore be able to buy more euros in the future. These traders don’t necessarily intend to take physical possession of the currencies themselves they may simply be speculating about or hedging against future exchange rate fluctuations.Ī forex trader might buy U.S. A vast majority of trade activity in the forex market occurs between institutional traders, such as people who work for banks, fund managers and multinational corporations.