Trading Forex is a relatively simple process in which one currency is exchanged for another. Huh? This may seem confusing at first, for it differs from the stock market (where you simply buy a share with the belief that it’s either going to go up or down). In the currency market, a specific currency may go up or down relative to another currency. For example, the Dollar may strengthen (rise or go up in value) against the Euro, but, at the same time, weaken (fall in value) against the British Pound. As we discussed above, economic news from a specific country can influence its currency. Therefore, one should never say that “The dollar strengthened,” but rather that “The dollar strengthened against the Euro.” Remember, a currency does not simply go up or down but does so relative to another currency. So, when you choose to trade a currency, you will trade a pair. These two currencies are known as the “currency pair”.

Currency Pairs in Forex

As mentioned above, currencies in forex trading are traded in pairs and are quoted in a shortened form such as EUR/ USD by all forex brokers. The first displayed currency is referred to as the base currency (in this example it is the Euro), and the second quoted currency is referred to as the “quote” currency (in this example it is the US Dollar).

You don’t, as a new trader, need to worry about understanding the meaning of “base” and “quote”. There is a much easier way to view currency pairs: you simply determine which currency you think is going to go up or down (this currency precedes the “/”) and against which currency you think it will move (this currency will follow the “/”). Remember, again, what we said earlier: a currency always goes up or down relative to another currency.

If you predict that the Euro will go up against the Dollar, you would buy EUR/USD; if, however, you predict that the Euro will go down against the Dollar, you would sell EUR/USD. In trading terminology used by most forex brokers, buying something is referred to as going “long”. If a trader is trading long in the EUR/USD, it means the trader is buying the Euro (base currency) and selling the US dollar (counter currency). The counter currency is the value of the price movement and the currency in which your profit or loss will be quoted in. For example, if you bought EUR/USD, your profits or losses would be displayed in US Dollars (not in Euros).

So, which currency pairs can you trade?

The most popular pairs -- those with the highest trading volume (85%) -- are commonly referred to as the “majors”. It is advisable to stay within these pairs unless your particular strategy demands otherwise. “Major” pairs are cheaper to trade and typically less volatile. All Forex brokers should offer these sets of “major” pairs.

Some of the major pairs actually tend to move in the same direction most of the time: these are the EUR/USD with the GBP/USD, the USD/JPY, the USD/CHF, and, finally, the NZD/USD and the AUD/USD. Other pairs spend most of their time trading in completely opposite directions: these are the EUR/USD, USD/CHF, GBP/USD, USD/JPY, AUD/USD and USD/CAD. Traders can trade more than one of these pairs knowing that they are most likely to either move in the same or opposite direction.

Some traders prefer to trade currencies other than the US Dollar, and the “cross currencies or crosses” allow them to do so. However, the “cross” markets are generally less liquid than the “majors”. The three most active non- USD currencies are EUR, JPY and GBP. There are other currency pairs you could choose to trade, sometimes referred to as “exotic” currencies which are available with forex brokers such as ThinkForex

If you feel that the South African Rand is going to appreciate against the dollar, you could buy ZAR/USD. However, these “exotic” currencies are not only very volatile but tend to cost more to trade.

Trading Zones and Market Hours

The major trading centres are located in London, New York, and Tokyo, and it is in these cities, during office hours, where the majority of the market activity occurs. The 24 hour Forex market follows the sunlight around the globe – each country’s trading centre is open from 8:00 a.m. – 4:00 p.m. (local time).

For example, when the market closes in the U.S., it is opening elsewhere. This is convenient for you as it means you can continue to trade. If you happen to live in Tokyo, the following time frames would apply to you: Europe would open when it is 3:00 p.m.; London when it is 4:00 p.m.; and New York when it is 9:00 p.m.

When working out the timeframe that suits your location best, make sure it is a session with heavy volume. These sessions usually occur when multiple countries’ markets are trading at the same time, for this allows the greatest price fluctuations which thereby present the best opportunity for you to make a good return on your investment.

The best part about currency trading is that besides forex, you can also trade with binary options, which is a lot more simpler. All you need to do is choose the direction of the currency pair and if your prediction is right, your tend to gain up to 89% of your invested capital. Its simple quick and much less complicated and thus makes it ideal to try it out if you are a beginner to forex trading.