The concept of trading on the Forex market is based on the process of buying one currency for another and inverse operation of selling it, to make a profit. You can make such transactions with almost every currency of the world. Let us analyze some examples.
Example 1: You have 1600 USD and the exchange rate of GBPUSD is 1.6000, which means that you can buy 1000 GBP for 1600 USD. You buy 1000 GBP, hoping that GBP will rise against USD. After a while, GBP really rises against USD up to 1.6100 for 1 GBP. With such a rate, you can exchange 1000 GBP for 1610 USD. This way, you have fixed a profit of 10 USD.
Example 2: Let us assume that you have 1000 GPB, and the exchange rate of GBPUSD is 1.6000. You sell your GBP for 1600 USD and you hope that GBP falls against USD. After a while, the rate falls up to 1.5900, and you decide to make a reverse operation and buy GBP for 1600 USD at this rate. As a result, you have 1006.28 GPB. This way, you have fixed a profit of 6.28 GPB.We can make several conclusions based on these examples:
- You can earn with both ways: when one currency either rises or falls against another one.
- The currency always rises or falls only against another one.
Currency Pairs, Cross Currency Pairs and Their Quotations
The main instrument on Forex is a currency pair – a ratio of one currency to another. There are more than 100 currency pairs on the market. Some currency pairs are traded in bigger volumes, whereas some of them – in smaller volumes. For example, 66% of all volume traded comes to major currency pairs (majors).
These pairs are EURUSD, GBPUSD, USDJPY, USDCHF, AUDUSD, and USDCAD. You have noticed that each pair contains USD. It is because USD is a world reserve currency. USD participates in absolutely all currency transactions.
Those currency pairs that do not contain USD, are called cross-currency pairs. The calculation of the rates of these currency pairs is carried out with the help of USD. For example, the calculation on the currency pair EURJPY will be executed this way: EURUSD to USDJPY.