With the rise of forex trading and the fact that it has become one of the most active trading markets in the world, you might think that now would be a great time to jump on the bandwagon and learn how to trade forex as a pro. You are absolutely right, now is a good time to do that!
Forex or FX trading is related to the conversion from one currency to another, and it is through that currency conversion that forex traders can make a profit. With hundreds of combinations of currencies to trade, there is plenty within the market to learn about and achieve great growth. So whether or not you’re using the skills that come with learning about FX trading or not, it’s useful information to have, and we’re here to guide you as best we can. So, to learn more about what FX trading entails and what terms like liquidity and pips mean, read on below.
What exactly is Forex Trading?
If you are a total novice to FX trading then it might be worth taking a look at what exactly forex is and what it does. It is essentially the process of converting one currency into another, and because they are traded in pairs, two currencies are traded against each other.
While there are an endless number of combinations to choose from, some of tthe most popular combinations include the euro against the dollar (EUR, USD), the British pound against the dollar (GBP/USD) and the US dollar against the Japanese yen (USD/JPY).
Just like any other trade you do, forex trading is also just one big trade, where you buy an asset with a specific currency. The profitable part of it comes in when the market can determine the price of how much of one currency is needed to buy the other.
Because each currency has its own unique code, you as a trader can identify which pair that currency belongs to, and because the market is so global, ranging from Asia to the US and Europe, it’s open 24 hours meaning you can buy and sell currencies when it suits you and for however long you want.
Where does liquidity come in?
Now that you know the basics of what forex trading is and have read a little bit about how it works, let’s talk about liquidity, a term you may have heard floating around before. Liquidity essentially leads us to how active a market actually is. The driving factor is the result of the volume of the currency being traded and how many traders are actively trading at the same time.
As mentioned earlier, thanks to the fact that the market is open 24 hours a day on any given weekday, the exchange market is quite liquid. Like everything else when it comes to the foreign exchange market, liquidity is also something that can fluctuate for a number of reasons, but for the most part, quite large trading volumes take place at any time of the day.
What Is Forex Liquidity And How Does It Work?
You’ve got a handle on liquidity, now let’s put forex and liquidity together and see what happens. FX liquidity is related to how easily a currency pair can be bought.
What we mean by that is that if a currency can be referred to as a currency with a high level of liquidity, it usually means that it can be bought and sold with ease, and traders generally prefer that pair for buying and selling, and for good reason – it pays off. Greater liquidity equals easier transaction flow and an opportunity for more competitive prices.
Based on the liquidity of a currency, they are usually classified into one of three categories, which are as follows:
Major currencies are some of the most popular options traded around the world. They have some of the highest liquidity and can be traded easily at any time. These include currencies such as the British pound, Japanese yen, US dollar, Canadian dollar and Swiss franc.
Minor currencies usually refer to any pair that does not have the US dollar as one of its currencies. This is also known as cross-currency pairing.
These are currencies that are not very liquid, are rarely traded and are not nearly as sought after as the majors. These can be something like the Thai Baht or the South African Rand.
It is important to understand these categories as it will help you decide what kind of currency you feel confident enough to trade in. As someone just starting out, it’s probably a good idea to stick with the majors as you learn the ropes because you know they’re easy to trade. In comparison, while exotic currencies may seem unattractive and may scare you off, an experienced trader will know exactly the best time to buy an undervalued currency and then be able to sell it accordingly.