Forex trading is intended to take advantage of shifts in the value of one currency compared to another. Let us first understand how the trading works, it is done by purchasing a currency at a low price and then selling it at a higher price, or by selling it first and then buying it back at a lower price, you can make a profit. You need to understand what exactly a currency pair is in order to understand how this works in reality. Relative to other currencies, currencies are priced. The price you pay will depend on whether you swap US dollars (USD), British pounds (GBP) or another currency for those euros if you buy Euros (EUR).
Now let see what are these currency pairs?
A currency pair is made up of a base currency and a reference currency or counter. The first currency in the quotation is the base currency and the second is the counter currency. The counter currency is the reference currency used to quote the base currency.
Let us take an example of being quoted at 1.1037-1.1039 for the EUR/USD. In this case, the base currency is the EURO and the reference currency is the USD. The price of the Euro will be quoted in USD. So, you have to pay USD 1.1039 to buy 1 euro. You would earn 1.1017 USD if you wanted to sell 1 Euro.
The most liquid currency for most pairs is generally quoted first. The USD is quoted second, however, when the USD is combined with the British Pound, Euro, New Zealand Dollar, or Australian Dollar. The quotation is known as a direct quote if the base currency is a foreign currency. The quote is known as an indirect quote if the base currency is the domestic currency.
Liquidity is an important part of Forex trading. If two countries have a good trading partnership, the currency pair should be very liquid with their two respective currencies. A currency pair that involves the currencies of two nations that do not have trading relationships, on the other hand, could be illiquid.
Due to high levels of liquidity, the major and minor currency pairs are the most common to Forex trading. As the distribution is narrow, these pairs can be exchanged in any time frame. In order to cover trading costs, exotic pairs may be exchanged but require greater price movements. This means you’re going to need high volatility levels or a longer time frame.
As traders, by researching, mastering an effective Forex trading strategy, developing an effective trading plan around that strategy, and following it with ice-cold discipline. We can take benefit from the Forex market’s high leverage and volatility. Money management is crucial here; leverage is a double-edged sword and can quickly make you a lot of money or quickly lose a lot of money. In Forex trading, the trick to money management is that you should always know the exact dollar sum you have at risk before entering a trade and be completely chill with losing that amount of money since any trade might be a loser.