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What are currency pairs, and why are they used in trading?

What are currency pairs, and why are they used in trading?

With the ability to make money no matter if markets are moving up or down, trading seems very attractive. Especially when considering the current global events, economic crisis, and possible recession in 2023. In this article, we will discuss what currency pairs are and if it’s a good idea to start trading them.

Forex explained

Foreign exchange or widely known as Forex is an international currency market that dwarfs every other financial market out there. Trillions of dollars are traded daily between international banks, hedge funds, corporations, and other participants. Liquidity, meaning the ability to sell an asset in the shortest amount of time, is Forex’s main selling point. The main trading instrument on Forex is currency pairs. Where each currency is paired against other currencies and their prices are visible to all participants.

But what does EUR USD mean?

EURUSD is a major pair on the Forex market. EURUSD shows how much USD it takes to buy one Euro. Depending on macroeconomic conditions, the price changes every fraction of the second. Euro in EURUSD is a base currency, while the USD is the quoted currency. Every pair consists of a base and quote currency and shows how many units of the quote currency are required to buy 1 unit of the base currency. Knowing this enables traders to understand what it means that EURUSD is 1.21. It is 1.21USD needed to buy 1 Euro. There are major and minor pairs in Forex. Major pairs are four EUR/USD, USD/JPY, GBP/USD, and USD/CHF.

While major pairs account for most of the trading volume on Forex, minor pairs should not be underrated. Minor pairs are also known as cross pairs and are pairs that don’t include USD but include one or two of other major currencies JPY, EUR, and GBP. We will not describe minors in any more detail here, to enrich your knowledge base read this guide to minor currency pairs for more info about them. While majors and minors consist of developed countries’ currencies, there is a third type of currency pair, sometimes called exotics. Exotic currency pairs include developed countries currency as base or quote. Exotics could be great when something important happens in their respective countries, but spreads are higher and should be traded very carefully.

Why trade currencies?

Currencies are liquid and open for 24/5 providing ability to trade without interruptions for 24 hours. This is great as it offers the ability to trade from anywhere in the world and still have a good night’s sleep. They provide enough liquidity to quickly open and close any trade, and volatility is also moderate. Volatility is very important to traders, as they can make money when there is enough volatility to move markets in any direction. Today’s robots and algorithmic trading have almost removed short-term volatility, so pro traders tend to focus more on day trading, meaning they often open trades for days and even weeks to catch good moves.

Advantages and disadvantages of Forex trading

Trading can be a very exciting experience when done wisely and with proper education and practice. But there are still some cons attributed to trading, with the main one being how difficult it is to start making profits in live markets. The knowledge base of a Forex trader consists of a good understanding of macroeconomic factors that affect currency prices and the ability to conduct a comprehensive technical analysis of the price chart of the specified currency pair, finding the optimal entry and exit levels.

Pros of Forex trading

  • Ability to make money from anywhere in the world.

It doesn’t require a trader anything else than a medium-budget pc and an internet connection. Any medium-budget laptop can run trading platforms like MetaTrader or Tradingview. These popular platforms are available even on smartphones, making it easier to trade on the go.

  • You control your working hours.

You can have total control over your time and how you spend it.

  • Making much bigger profits than average salaries in underdeveloped countries. This one is probably one of the coolest benefits of trading. You can make more than what an average person makes, and you can do it with much less time per day and per week.
  • No outside oversight and the director No one controls how you behave and spend or manage your time when you are a pro trader

Cons of Forex trading

  • The long and difficult learning curve. It requires good knowledge of several financial fields and nuances to become profitable
  • Discipline is key. It is hard to be disciplined for many people if they don’t have a boss. This is actually the number one challenge when addressing the trading profession for beginners.
  • Psychology and emotional intelligence. It is hard to open another trade and be balanced if you end up losing the latest trades. Sometimes it happens that a losing streak throws even the most powerful minds off balance. Losing real money is hard, especially when trading is your main job.

Make sure you understand yourself and be disciplined to be a successful trader.

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