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Exploring Currency Pairs And Their Different Aspects

Before we can start any Forex trading, there needs to be a certain amount of knowledge about the currencies in use. There is a large list to choose from, but the four most popular and liquid currency pairs traded are known as “the majors”. These are “euro”, EUR/USD, “gopher”, USD/JPY, “cable”, GBP/USD and “swissie” USD/CHF.

The classifying and categorisation of currencies into different groups can occur in many ways, depending on the chosen criteria. Generally, the policies of central banks, the country’s current account position (the surplus or deficit amount), and interest rates are the primary values used.

Categorisation Examples:

Reserve Currencies

You will find reserve, or anchor currency, in significant quantities in any country’s foreign exchange reserve. The US Dollar, Euro, Japanese Yen and the Swiss Franc are four of the most dominant in the global economy.

If you consider the Japanese Yen, you can see it has been diminishing in value since the 90’s, whereas, the Euro has grown continuously since its launch. The USD, however, has remained constant as one of the major currencies around the world and holds the highest prevalence in central bank currency allocations. The USD holds around two-thirds of the global Forex reserve, making it the world’s leading reserve currency.

There is a ‘rule of thumb’ that most traders adhere to. This is that when countries are experiencing a period of economic troubles, the reserve currencies as a group, tend to appreciate. The opposite also occurs, as in a period of economic boom the reserve currency tends to depreciate. As with any ‘rule of thumb’, it is a generalisation as many variations will affect the behaviour of world currencies. It is important to note that in a period of robust economic growth an increase in the supply of reserve currencies can be seen.

Commodity Currencies

Certain countries have abundant natural resources that they can trade in, such as Brazil, South Africa, Australia, Russia or Canada, to name a few. Commodity currencies are the monetary units of these countries, that is Brazilian Real, Australian or Canadian Dollars, Russian Ruble and South African Rand. The sale of these natural resources is the main export for these countries and, as such, the strength of the country’s economy can be dependent on their trade. This dependency can create a degree of diversity concerning trade balance or economic sophistication, as many are amongst the developing nations. Forex trading in commodity currencies is very dependent on the resilience of the global commodity market.

High-Risk Currencies

As the name suggests, these currencies can frequently change as they are the currencies of nations with high budget or trade deficits, and most also have a significant USD debt. These currencies appreciate when the economy is booming, as they receive capital from developed countries to add to their assets. When there is an economic depression, the currencies then begin to depreciate, as global capital withdraws from risky assets. Currencies such as the Romanian Lew, Iranian Rial or the Turkish Lira are amongst this group.

Conclusion

A Forex trader needs to be able to evaluate available data thoroughly, and while the above descriptions are simply stated, they do contain basic concepts that every trader should understand. All traders need to establish a strategy that is both simple and disciplined, and one that can utilise the information gathered for making a profit. In the next part of the course, Forex analysis is discussed, which explores how to make sense of the highly variable, complicated information which is available. Which tools will aid the most in helping to generate trading signals on which currency pair to trade on at a specified time and price?

More From The Free Forex Trading Beginners Course

Part 1: Reading A Currency Quote
Part 2: What Are Forex Pips, Leverage, Lots, And Margin?
Part 3: Explore Currency Pairs And Their Different Aspects
Part 4: Fundamental Analysis And Technical Analysis In Brief
Part 5: The Use Of Forex Technical Analysis
Part 6: The Importance Of Fundamental Analysis For Forex
Part 7: You Need To Apply Some Psychology To Be A Successful Trader
Part 8: Finding The Best Forex Broker Online
Part 9: Disclaimer