2012: Advent Trading: What can be traded: Forex

by on December 14, 2012

The second major instrument to be traded is called Forex, which stands for Foreign Exchange. This involves buying and selling currencies similar to how you’d do it in the post office.

Currencies are traded in currency pairs and a currency is denoted by the three character currency code. Examples are: GBPUSD (Great British Pound / US Dollar), EURUSD (Euro/Dollar), CHFJPY(Swiss Franc/Japanese Yen).

There is a symbol hierarchy for which currency will always be specified first in a pair, it goes:

EUR, GBP, AUD, NZD, AU, AG, USD, CAD, CHF, JPY

This ordering was laid down by the Americans after World War 2 and the Japanese Yen will always, without exception, be the last currency in a pair. That’s what you get for making an enemy of the Americans… These currencies are all called major currencies, but minor currencies like the SEK (Swedish Krona) will come after CHF and before JPY.

There are also 2 metals in the list. AU is Gold, and AG is silver. These metals are treated as a standard against most currencies and so they’re traded in a similar fashion. We’ll come to commodity trading at a later date.

The currencies within the currency pair are given the names base currency for the first currency, and counter currency for the second. As such, if you buy a forex pair, what you’re doing is buying the base currency and selling the counter currency. Similarly if you sell a forex pair you’re selling the base currency and buying the counter currency.

To look at it another way. If you buy a forex pair, you’re hoping that the exchange rate is going to go up, or that the strength of the base currency is going to get better in comparison to the counter. If you sell a forex pair, you’re hoping that the exchange rate is going to go down, or that the strength of the counter currency is going to get better in comparison to the base.

Currencies are traded 24 hours a day, 6 days a week ( sunday is a day off globally ).

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