Forex 101 – Currency Pairs

Forex 101 - Currency Pairs

Foreign Exchange trading (Forex, hereafter) is a market that’s opened up to private investors since the 1990s, and it currently has over two trillion dollars worth of trading transactions every single day, making it the single largest market in the world.  The key to forex trading is that everything has a relative value; you want to buy a currency low and sell it for more than you paid for it. 

Currencies are listed with an exchange rate; for example, right now, one British Pound is worth $1.9248, meaning that it’s worth about a dollar ninety two.  This is the Dollar/Pound Currency Pair.  The relative value of a currency pair will shift over time; sometimes, it’ll shift fast – within minutes or seconds, usually just after a bank opens or just before a major bank closes; this is why most Forex traders live or die on the London close.

Now, a position for a forex trade would be to buy pounds at $1.9248 and expect to sell them when they hit a certain price, say you expect them to break $2.00 for whatever reason.  (There are lots of reasons to expect this; big bailouts are inflationary on the currency being used, and the US government is doing a lot of bailouts right now.)

The amount that a currency pair’s relative valuation can change is called its swing.  In day trading, swings can be in 10ths and hundredths of a cent, and the money is made by using leverage to buy (and sell) large blocks of currency.  Swings have a period (how rapidly they change), and fast swings (both up and down) are good for doing day trading style strategies.

Currency pairs also have other swing patterns; there are seasonal patterns in currency trading (like the fact that the dollar always rises in the summer time, due to Americans spending time on vacation, or the fact that the Euro rises in August for the same reason – most of Europe takes their vacation at the same time). 

If you’re just getting into forex trading, focus on long term swings and position trading.  These won’t make you as much money, as quickly, but their risk is lower.  More importantly, you don’t need to get into leveraging agreements to make a decent profit at it, and they don’t require that you spend all of your life watching numbers on a screen to push a trade through when the right numbers come up.

If you’re looking at the various online forex courses, be aware that most of them want you to get into a day trading strategy.  This can make you a lot of money quickly – it can also lose you a lot of money quickly.  It also requires constant vigilance;

Regardless of which strategy you use, forex trading can be a reasonable way to earn a living.  It’s still a job, it just happens to be one that’s well suited to certain types of people.  If you’re the sort of person who agonizes over when you’ve lost money on a bad trade, this may not be the right job for you.