If you’re new to the world of forex trading, you’ll need to understand precisely how to invest in currencies on the foreign exchange. In simple terms, currencies are traded in pairs, after investors are presented with a price quote of the real-time exchange rate. When an order is placed for a currency pair, the first listed (or base) currency is bought while the second is sold, with the derivative nature of the market making it possible to profit even as the value of the underlying asset depreciates. In this post, we’ll review currency pair trading in further detail, whilst appraising the steps that you can take to achieve success.
1 Prioritise Major Currency Pairs
Whilst there are various currency pairings available on the forex market, beginners should focus on the select few that dominate foreign exchange volumes. The reason for this is simple; as 85% of the $5.3 traded each day on the forex market revolves around seven major currency pairings, namely EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, USD/CAD, USD/CHF.
The overwhelming popularity of these pairings also focuses the attention of online brokerage platforms such as Oanda, who tailor their live news feeds to provide real-time analysis of the world’s leading currencies. This enables you to build more effective and informed trades over time, with a view to laying the foundations for long-term and sustainable success.
2 Start with a Single, Major Pairing
Whenever you launch a trading portfolio, it’s important to start modestly before you look to scale your efforts in line with your experience and knowledge base. Forex trading is no exception to this rule, so we’d recommend starting by trading a single major pairing in an online demo account. This will afford you experience in a simulated, real-time market, which can then be transferred into the live arena with a minimum of fuss.
One of the best pairings, to begin with, is the GBP/USD, which remains one of the most popular and widely covered forex assets in the world. There are also a number of high-profile economic indicators that can help to inform this trade, from the Bank of England’s monetary policy and respective labour market figures to industrial production output and the Purchasing Managers Index (PMI). This pairing also offers value in the current economic climate, with Brexit creating a scenario where the pound continues to trade within a narrow range and a relatively predictable pattern.
3 Consider the Euro or the Yen as you Expand Your Portfolio
According to some figures, the USD is the single most traded currency in the world, with the greenback involved in more than 70% of all global trades. However, you may want to consider introducing major cross-currency pairs into your portfolio over time, with the best options involving either the Euro (EUR) or the Japanese Yen (JPY).
The EUR is certainly a popular and influential currency, which is commonly traded with the GBP, the Canadian Dollar (CAD), and the Australian Dollar (AUD). As for the JPY, this is largely considered to be a relative safe haven in the forex market, thanks largely to the debt structuring in the Japanese economy and the noticeably stable performance of the currency over a sustained period.