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HomeFinance and AccountingMarket TradingWhat Are Forex Pairs and How Do They Work?

What Are Forex Pairs and How Do They Work?

So, what exactly is forex trading? Well, while there will be similarities, it may be different to what you are used to in other capital markets. Many have experienced the action throwing their hands up in despair when attempting to enter the world of forex trading. Often, the root of this confusion is in fully understanding just how forex pairs are traded.

First things first, forex is an abbreviation standing for foreign exchange. It gives us the relative value of one particular currency in relation to another. So to put it simply, forex trading is the action of trading one currency in exchange for another. In essence, this is something that a large proportion of the world’s population has partaken in at one time or another, usually when on holiday or on a business trip. So yes, if you have ever exchanged your local currency for a foreign currency when travelling, you already have one foot in the door that eventually leads to the wonderful world of forex trading.

What are Forex Pairs?

There are a few things that you need to understand in relation to forex pairs before you start trading. As previously stated, it is slightly different to other capital markets. The most commonly traded currency pair in the world is the Euro (EUR) and the United States Dollar (USD), so we will use that as our example. When you see this particular forex pair written like this, EUR/USD, it represents the exchange rate between the Euro and the United States Dollar.

How do Forex Pairs Work?

The first currency in this pair (EUR) is called the base currency and the second currency (USD) is referred to as the quote. So when you are looking at the forex pair EUR/USD and the exchange rate is 1.12, you know that it costs $1.12 to buy 1. The good news is that this is how every forex currency pair you see functions.

The second aspect you should understand is that when you are buying or selling an exchange rate, you are fundamentally making an investment on the basis that one of the currencies is going to weaken or strengthen versus the other one. So if you think that the Euro is going to gain in value versus the US Dollar, you can make an investment based on that line of thinking. Consequently, if you can determine and predict the overall trend of the strength of one currency versus another, you will likely be more than happy with your investments!

From this point, you can already find a forex broker online and begin trading. The best possible advice for any beginner is to start small. Make sure you understand the fundamentals, starting with forex pairs. Prove to yourself that you can actually trade before raising the stakes. If you want to continue trading in the long-term, you need to build a foundation from which to grow. By starting small, you reduce the pressure of each investment and are better able to refine your craft and develop your ability to predict as well as to determine the market as a whole.

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