Learning FX can seem overwhelming. In his latest blog post, Sheriff explains the basics behind the currency markets and the most popular currencies traders need to be aware of.
If you’re new to FX, you may be wondering where on earth to start. But before you attempt to learn any of the mechanics behind successful trading, it’s a good idea to become familiar with the currency markets and the world’s most popular currencies.
With this in mind, I thought it would be a good idea to write a post answering some of the basic questions novice traders might need answering.
How the currency markets work
You might have heard of the stock market – but it’s actually the currency markets which are the most actively traded markets in the world. The Triennial Central Bank Survey (2007) estimates that the daily trading volume of more than $3 trillion.
The majority of this money is traded by large banking institutions and multinational corporations in the world’s financial centres of London, New York and Tokyo. In order to compete, individual traders need to acquire a deep understanding of market fundamentals.
The sale of one currency and the purchase of another equates to one transaction in the currency markets. The two currencies involved in a transaction are commonly referred to as a ‘pair’ – and the a significant proportion of trading takes place amongst the most popular currency pairs:
US dollar (USD)
Pound sterling (GBP)
Japanese yen (JPY)
Swiss franc (CHF)
Swedish krona (SEK)
Australian dollar (AUD)
Canadian dollar (CAD)
How do FX traders make a profit?
FX traders make profits by making a judgement on whether the value of one currency will increase, relative to another.
Let’s take a look at a simple example. At close today, the currency quote for a GBP/USD pair was 1.5283. The base currency for this pair is GBP and has a value of one unit (this is the case for all base currencies in any pair) – so this means that one pound sterling is currently worth 1.5283 US dollars. So should the base currency fall in price, or the quoted currency rally, the FX trader in question stands to make a profit.
A whole host of economic factors can affect the price of currencies. The best FX traders are able to monitor these factors and make trades at the time which yields the most profit. But this is not any easy skill to develop, it takes patience and practice.
Be sure to check out my daily FX trades which can help identify the best trading opportunities across the major currency pairs.