Why do forex trades come in pairs

Currency pairs on forex

Forex is the term used for international currency trading. The main trading instrument is currencies. Currencies are traded in pairs. One currency is used to buy the other. If a trader wants to establish himself successfully in the foreign exchange market, he must of course deal more intensively with the subject of currencies, foreign exchange and finance.

 

The financial market

The financial market is an umbrella term for all markets whose object is capital. Only cash payments are made. There are national and international markets. The division visible in the figure is due to the different conditions and market participants. Forex is where international currencies are concerned. These are exchanged or traded in the form of book money. The foreign exchange transactions take place outside the stock exchanges, but are closely linked to the trading hours of the international stock exchanges. The trade takes place almost exclusively electronically.

Large amounts of foreign currency are being moved. For this purpose, lot sizes were specified as the unit of measurement. Currency prices can change quickly. Therefore, speculation on foreign exchange rates, i.e. price changes in the future, is characterized by great risk. In order to be able to handle this, the participants in Forex need sufficient knowledge and various skills in technical analysis.

 

Currencies on Forex

Since it is basically an exchange transaction, not just one currency can be traded. Therefore, the trader has to choose a pair. The currencies themselves are divided into major and minor currencies by experts. The market participant finds the largest number of currencies in the minor currencies. These are the smaller currencies that are also often called exotic.

The major currencies, like the minor currencies, can form currency pairs with one another or with one another. It is only worth trading currencies if you want to earn money from the price differences that are in sufficient demand. Otherwise there will only be unnecessary costs due to the spread and the swap.

 

Currency pairs

The currency pairs of large economic areas are the most traded. The first places take the following currency pairs:

  • US Dollar - Euro,
  • US dollar - Japanese yen,
  • US dollar - British pound,
  • US dollar - Australian dollar,
  • US dollar - Canadian dollar,
  • US Dollars - Swiss Francs,
  • Euro - Japanese YEN,
  • Euro - British Pound,
  • Euro - Swiss Francs,
  • Euro - Canadian dollar.

The so-called exotic currency pairs with the Swedish krona, the South Korean won and, lately, for political reasons, the Russian ruble are increasingly being traded. There are currently around 160 official currencies. Anyone who is proficient in mathematics can easily work out how many possible currency pairs there could be. Not all currency pairs are interesting trading instruments at all times of the day. Also, not all currencies are in demand at all times. The example of the crisis in Ukraine and the role of Russia shows how a currency can become an interesting object of speculation in times of crisis. You could make good money with the drop in the price of the ruble.

 

Influences on the price

In the long term, the so-called fundamental data have an impact on the price development of a currency. These are the economic power of industry, the demand for industry and consumer goods, the development of the labor market, the monetary policy of a country and always in relation to the developments in the same areas of the second currency of the currency pair. The short-term influences come from the current demand for currencies. This depends on trade, the economies' need for foreign exchange, and the demand from speculators. The Forex trader examines the first price influences using fundamental analysis and the latter using technical analysis. The behavior of market participants can be predetermined to a certain extent by means of chart analysis. The traders use chart formations and technical indicators for this.

Traders have a trading strategy. This specifies the trading hours and the method of trading. Therefore, a trader will only trade a certain selection of currency pairs. Due to certain influences, which are named above, some currencies may also be shortlisted at times. The trader often only uses a limited number of currency pairs, as these are characterized by a certain character. The trader can understand them in some way. This increases the profit prospects.