(ThyBlackMan.com) In recent years, South Africa has embraced online trading currencies. Anyone can register a live account and connect to the gigantic global market. With dedicated platforms and apps, retail trading is more accessible than ever. If you are wondering how to trade currency properly, here are the fundamentals.
International foreign exchange is defined as the over-the-counter market. This means that participants (institutions and individuals) act without centralized supervision. This environment is entirely virtual, so no physical platform is necessary. As a retail trader, you can speculate on exchange rates and buy or sell world currencies for profit. Five days a week, trading is incessant.
Overview of Pairs
Any tradeable pair belongs to one of the three categories: Major, Minor, or Exotic. There is no universal classification, so every broker may rely on their specific vision. The differences, however, are only slight. For instance, the famous FXTM broker allows South African traders to choose between:
- Major pairs (with USD): e.g., EUR/USD,
- Cross pairs (without USD): e.g., AUD/CHF,
- Exotic pairs (combinations of USD with currencies of developing nations): e.g., USD/ZAR.
Every pair follows the same basic formula: ‘base currency’/’quote currency’ (aka ‘counter currency’). For example, the figure for USD/ZAR shows how much South African rand one US dollar is worth. The ‘Ask’ price is valid for traders who wish to buy USD for ZAR. The ‘Bid’ value is for sellers. The difference between the two prices is known as ‘spread’ and it determines profit for the broker.
Are Majors Your Safest Bet?
These combinations include currencies from countries with the biggest trade power. The exchange rates are always in flux as volumes of international trading are never static. Fluctuations may be significant, which translates into viable profit opportunities for shrewd players. Some of the most popular choices today include Euro – US Dollar, US dollar – Japanese Yen, British Pound – US Dollar, and Australian Dollar – US Dollar.
The US currency is the leading reserve currency in the world. It serves as a reference for most global currency exchange transactions. The American dollar is traded most extensively and it is regarded as the strongest. This is due to the sheer size and power of the national economy. Hence, pairs with USD have high liquidity, which means sellers and buyers have a little problem connecting.
Do not think major pairs are most likely to bring profit by default. Badly timed trades will also result in losses. However, general conditions are generally more favorable – for instance, the spread (the difference between the Ask and Bid prices) is tighter.
Two Popular Choices
Traders who want to play it safe often choose the USD/EUR duo. It offers low spreads and higher predictability. As the pair is only moderately volatile, it is seen as less risky. Another advantage is the abundance of financial data concerning both elements of the pair.
Another combination of two powerful currencies, USD/GBP, is notable for its higher volatility and jumps. This means you can gain more from short-term fluctuations but the risks are also higher. Analysis information is easy to collect, which accounts for the popularity. The third popular option is USD/JPY, which is known for its smooth dynamics.
Favorable Spreads
Many experts will advise you to look for tighter spreads. These are common for all majors with the exception of USD/GBP. How big is an acceptable spread? Look for values between 0 and 3 pips. At 6 pips or more, the combination is too pricey, which may translate into a significant loss. However, even high-spread pairs can prove beneficial if you have a solid risk management strategy in place.
No Shortcut to Success
Unfortunately for rookies, no single currency combination is guaranteed to be profitable. Trading on global markets is risky, as price dynamics are swayed by myriad factors. The rule of thumb is to opt for types with high liquidity, as these are the easiest to trade. Thus, if the currency of your own country is tradeable and volatile enough, you can benefit from the knowledge of domestic financial trends.
A handy source of such news is the special Forex calendar. A feature of the MetaTrader environment, it displays forecasts of economic announcements. Base currencies in exotic pairs are most commonly valued against the USD. Therefore, keep an eye on the health of the US dollar as well.
Bottom Line
With the sheer number of currency pairs available, making a choice can be challenging. Look for combinations whose workings are the clearest. The more you know about the economies they represent – the better the potential. Even exotics can prove profitable if you know how they work. There are no shortcuts to success, but one thing is universal: knowledge is priceless.
Staff Writer; Larry Shaw
