The Simplicity of Forex Trading Explained

If you have looked at trading in the past, but only got as far as looking at the stock market, commodities, or options, then you should be prepared to be surprised by what Forex trading can offer you.

When you trade stocks, you rapidly learn that there are thousands of different company shares available on each stock market. Even once you have formulated a trading plan, it can be a logistical nightmare to search through or screen the stocks to find some that comply with your trading strategy. Taking a global view, and trading stock indices through funds or spread betting can simplify matters, but then you lose some of the potential for large gains, as each index will serve to average out the price moves of the constituent elements.

Commodities and futures can have additional complications, with a number of market sectors and component parts, coupled with the need to decide on expiration dates and analyze different choices. Options are perhaps the most complex, offering a range of trading choices for even the simplest of financial securities, and a number of Greek letters to “help” in the analysis of them!

At first sight, you may think that Forex would be similarly involved, given the number of countries and currencies that there are in the world. Forex involves trading different pairs of currencies for their relative values to each other. If you try and work out the number of permutations that you can have of any two currencies, then you will come up with a large number.

In practice, you will find that Forex traders keep their lives much simpler than that. There are four major currency pairs that account for well over half of all Forex trading. Top of the list is the EURUSD (“Fiber”), euro v. US dollar, which accounts for 27% of all trading volume. The next most heavily traded is the USDJPY (US dollar v. Japanese yen), another 13% of trading volume, followed by “Cable”, the GBPUSD (pounds sterling v. US dollar), at 12%. The fourth is the USDCHF, the “Swissie”, which combines the US dollar with the Swiss franc.

The majors include other currencies paired with the US dollar, such as the Australian “Aussie” (AUDUSD), the New Zealand “Kiwi” (NZDUSD), and the Canadian “Loonie” (USDCAD). These three are also known as commodity pairs, for the obvious reason that the countries involved are rich in natural resources.

The majority of Forex trading centres on these eight currencies, which for extended choice are typically combined in pairs in just another eleven ways, rather than using all the possible combinations. Already you can see that Forex is much simpler than trading in stocks.

The other point to be made is that, even if you take the top 18 currency pairs, there is some duplication for research. For instance, one of them is the AUDCAD, the Australian dollar versus the Canadian dollar. If for instance you believed that Australia was going to do something to improve the international worth of its currency, then you have the choice of buying the AUDCAD or of buying the AUDUSD, either of which would allow you to profit, all else being equal. Most Forex trading boils down to a simple assessment of which of the eight currencies is likely to go up, and which down.

Published by Reece Matthews

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