Now we know a little more about what the forex market is, let us take a look at the currencies that are traded and how they are traded. We have talked about how massive the forex market is as a whole, so let us now dig down a little deeper into the individual currencies that make up this huge market.
Below is a list of the most popular, actively traded currencies in the Forex market as well as their abbreviations that traders use:
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US Dollar (USD)
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Euro (EUR)
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Japanese Yen (JPY)
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Pound Sterling (GBP)
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Australian Dollar (AUD)
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Swiss Franc (CHF)
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Canadian Dollar (CAD)
But in the forex market, you cannot simply buy or sell these single currencies alone. In forex, currencies are quoted and traded in pairs, hence the name currency pairs. It makes sense when you think about trading currencies with real-world applications and not simply as a paper share in a company or a futures contract. When you want to buy a specific currency, what are you going to pay for it with? Of course, another currency. This is where the idea of forex currency pairs comes from.
Here we have listed the most commonly traded forex currency pairs:
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Euro / US Dollar (EUR/USD)
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US Dollar / Japanese Yen (USD/JPY)
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Pound Sterling / US Dollar (GBP/USD)
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US Dollar / Swiss Franc (USD/CHF)
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Australian Dollar / US Dollar (AUD/USD)
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US Dollar / Canadian Dollar (USD/CAD)
Now let us look at an example of a forex trade. Say that your analysis is telling you to buy EUR/USD. This essentially means that you are buying the Euro and selling the US Dollar. Because each currency pair is a relationship between the two different currencies quoted, you have a few different scenarios that could put your trade-in in a profitable position.
Put simply, you will profit if the Euro rises and the US Dollar falls. But the currency pair relationship also means that you will profit if both currencies are rising but the Euro rises more and likewise if both currencies are falling but the USD is falling faster.
Be sure to log into your VT Markets MT4 demo account and try both buying and selling different forex currency pairs to get your head around the relationships.