Forex trading involves currency pairs to trade between different currencies across the world. Forex traders make profits from exchanging one currency with another using the exchange rates provided by foreign exchange. If an individual is getting one currency exchanged from another due to business, tourism, or any other reason then it is also known as (FX) forex trading.
Every transaction in forex trading involves two currencies, one is bought and the other one is sold. The foreign exchange derives exchange rates in currency pairs.
What Is a Currency Pair?
A currency pair indicates an exchange rate of two currencies. It conveys what value of one currency can be bought from a single unit of another currency. The terms used for both currencies are base and quote currency. For example, GBP/USD is a currency pair in which GBP is the base currency and USD is the quote currency.
The forex market is the most liquid market which involves trade in currency pairs. There are different types of currency pairs, which are used in forex trading. The types of pairs are:
- Major Currency Pairs
- Minor Currency Pairs
- Exotic Currency Pairs
Major Currency Pairs
The primary way of major currency pair recognition is that it involves USD. A currency pair with USD is considered the most liquid currency pair because USD is used for international transactions and trades. These pairs are the ones that are most actively traded in the foreign exchange market. Some major currency pairs are:
- GBP/USD - Pound Sterling/US Dollar
- USD/CHF - US Dollar/Swiss Franc
- EUR/USD - Euro/US Dollar
- USD/JPY - US Dollar/Japanese Yen
Minor Currency Pairs
A minor currency pair is the one that does not involve USD and these pairs are also known as cross currency pairs. They are a little bit less liquid as compared to major currency pairs. The spreads are also on the higher side for these currency pairs. Some minor or cross currency pairs are:
- EUR/GBP - Euro/Pound Sterling
- GBP/JPY - Pound Sterling/Japanese Yen
- EUR/AUD - Euro/Australian Dollar
- GBP/CAD - Pound Sterling/Canadian Dollar
Exotic Currency Pairs
An exotic currency pair includes currencies of developing countries that are still emerging and struggling with their economic conditions. Their liquidity is very low as compared to other currency pairs and the spreads are also much wider. A few examples of exotic currency pairs are:
- EUR/TRY - Euro/Turkish Lira
- GBP/ZAR - Pound Sterling/South African Rand
- AUD/MXN - Australian Dollar/Mexican Peso
- USD/THB - US Dollar/Thailand Baht
Comparison Between USD, Euro, and GBP
These three currencies are the most liquid and used currencies in forex trading. The demand for these three currencies is always on the higher side in the foreign exchange market. All of the three currencies are generating competitive returns for their investors or traders. But which is the more reliable among these?
US Dollar (USD)
The US dollar is used by the third most powerful economy in the world, which is the United States of America. Although the economy comes on the third worldwide position, the currency is the most powerful currency of the world.
Origin of US Dollar
The US Dollar was introduced in 1944 by the United States of America. It has gained strength with its wide use for trade across the world.
Advantages of Trading in the US Dollar
Forex traders who trade in the currency pairs of USD have multiple benefits as it is the most widely traded currency. Some of the benefits are:
- It is the most powerful economy in the world.
- Several international trade transactions are settled in the US dollar.
- It is stronger than most of the other currencies across the world.
- Multinational companies are deriving huge sales from the United States of America, which ensures a strong presence of the US dollar.
Euro (EUR)
At present, the Euro is being used in 19 European countries and after the US Dollar, it is the second most popular currency in the forex market. The Euro is managed by a single central bank, which is the European Central Bank (ECB).
Origin of Euro
Euro was first introduced as a currency for electronic payments in 1999. It includes debit and credit cards, banking, and loan purposes. The physical form of the Euro currency is launched in 2002. When Euro coins and notes are published by the bank.
Advantages of Forex Trading in Euro
Several traders, trade in currency pairs that involve Euro in it. It has many trading advantages that are listed below:
- Business opportunities are higher in European countries.
- This currency is safer than other currencies for investment as the returns are stable.
- The economies of European countries are among the most powerful economies in the world.
- Many leading companies are operating in European countries and they produce products at comparatively lower costs.
British Pound Sterling (GBP)
GBP is the compact form used for the British Pound Sterling. It is the official currency of the United Kingdom and the British overseas territories. This is also one of the strongest currencies in the world.
Origin of British Pound
It is the oldest currency that is formed in 1707 in the United Kingdom. This currency was also used in Australia, Canada, and New Zealand. The Bank of England is the central bank that undertakes the work of publishing British Pound Sterling.
Benefits of Forex Trading in British Pound
Multiple benefits are associated with forex trading in the British pound. Some of the benefits of trading are:
- A strong presence of the currency across the world ensures stable returns to investors.
- The United Kingdom is experiencing increased economic growth that can fetch greater returns.
- The number of exports is higher in the UK as compared to the number of imports required by the economy.
- The production carried on in the UK has a lower cost that attracts foreign buyers and making the currency stronger.
All three currencies are having a strong presence in the foreign exchange market. Traders need to analyse the situation from which they can derive higher profits.
Which is Stronger US Dollar or Euro?
The US dollar is the most used and valuable currency in the world. On the other hand, the Euro is the main competitor of the US dollar. It is the most powerful currency in the world. However, in the long run, valuable currencies are expected to give a stable return as compared to other currencies.
So, it is suggested that traders can buy Euro if they are expecting an opportunity for profit-making but they should go for the US dollar if they are planning to get returns in the long run.
Is the Euro Stronger than the British Pound?
The British Pound is the strongest currency in the world and the Euro is the second strongest currency in the world. The Europen economy is emerging at a faster rate than the British economy. It means that if you are investing in Euro it is better for a long period but if you see any profitable opportunity with GBP you can trade in it.
Which Broker is the Best for Forex Trading?
There are many brokers which are forex trading platform. It is a highly liquid financial market with many opportunities for traders. Some of the brokers are:
These brokers are offering commission-free trading on their trading platform. They are providing maximum leverage of 1:500 to traders. MT4 is a trading platform, which is compatible with desktop, mobile, and web trading.
Traders will get a wide range of educational material that can be used for profitable decision making. You will also get a demo account for a free trading experience. Choose the broker which you find most suitable according to your requirements.
The Bottom Line
Forex trading is carried on using currency pairs, in which traders buy one currency and sell another currency. After studying the market traders have to analyse, what currency pair can fetch the highest profits. The US dollar, Euro, and British pound are the most demanded currencies of the foreign exchange market.
Traders have to buy and sell currencies through a broker. You can choose a trusted broker and a reliable currency according to the above discussion and start trading in forex.
Still many people see Forex as a boring industry, one that demands the constant task of heavy analysis, stress and risk.
But if you look deeper into the market, then you will see dynamics and the profit generation opportunities turn it in a lucrative option for making more money or even starting a business.
Here you can read some most interesting facts about Forex Market if you are start trading in Forex Market.
Approximately 5.3 Trillion Dollars traded daily in Forex Market which is more than future and equity market combined.
66% of US Currency is held overseas by private individuals, foreign governments and institutions.
Back before fiber optics and satellites, stock exchanges in London and New York communicated by a long steel cable under the Atlantic.
