The Basics of Forex Trading – Part 2

What is Traded in Forex?

It’s an easy answer… money — various national currencies are traded. Since you’re not buying an actual item from Amazon that you can feel and touch, forex trading can be baffling. So, we’ll use a straightforward analogy to help clarify.

When you consider forex trading, think of buying currency as if you are buying a share in a specify country — like buying shares in a company. The price of the currency is typically a direct refection of the market’s view on the current and future health of its individual economy.

In forex trading, when you buy, say, the British Pound, you are basically buying a share in the UK economy. You are wagering that the British economy will do well and might get better in the future. Once you sell those “shares” back to the market, hopefully, you will end up with a profit. Commonly, the exchange rate of a currency against other currencies is a signal as to the condition of that nation’s economy, compared to others.

There are always three letters in each currency symbol — the first two letters identify the name of the country, and the third letter identifies the name of that country’s currency, normally the first letter of the currency’s name. By 1973, the International Organization for Standardization (ISO) established the three-letter codes for currencies, and these three letters are known as ISO 4217 Currency Codes. Take AUD as an example. AU stands for Australia and D stands for dollar. The currencies contained in the chart bellow are called the majors because they are the most commonly traded ones.

Buying And Selling Forex Currency Pairs

In Forex, a transaction is a simultaneous buy-sell — buying of one currency and selling the other. Thus, they are traded in pairs and quoted in relation to one another. Example pairs might be the U.S. dollar and the Canadian dollar (USD/CAD) or the Euro and the Japanese yen (EUR/JPY). In a pair, each currency is constantly fluctuating in relation to the other, like two anchors in a game of tug-of-war. The prevailing price of two currencies from two different nations is the exchange rate. Depending on which currency is stronger now, exchange rates are always changing.