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Forex Trading: What Is It?

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Trading is a way to make money by buying and selling different commodities. This could be anything from shares in a business to currency, or even oil and gold. 

Trading currency, in particular, is an incredibly popular market, and every day people trade approximately $5.9 trillion. Whether you want to make a little passive income or become a Bitcoin Billionaire, here is some information about trading as well as a list of market orders you need to know when you trade your currency. 

Currencies are like the shares of a country. This is in the sense that the value of a currency reflects the ‘value’ of a country, or, ostensibly, its gross domestic product. Unlike the stock market however, the overwhelming majority of the foreign exchange market revolves around only 8 currencies. These are: United States Dollar (USD), the Euro (EUR), Japanese Yen (JPY), Great British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), Australian Dollar (AUD) and New Zealand Dollar (NZD). 

The largest economy in the world is that of the United States, and so all currency pairs involving one of these currencies (listed above) and USD is classed as a ‘major pair’, EUR/USD for example. A pair involving two of these currencies (listed above) that doesn’t feature USD is classed as a ‘minor pair’, GBP/JPY for example.

The class of currency pairs which are less commonly traded is referred to as ‘exotic’ currency pairs; which include a major currency and the currency of a developing country, such as Brazil or South Africa. 

These ‘major’ currencies loosely reflect the nations with the world’s largest economies, and are therefore the currencies in highest demand. To buy products from a certain country, the transaction will need to be carried out using that country’s currency; this is traditionally where the foreign exchange would come in to play. 

Market Orders

When placing trades via your account with a broker, there are various types of orders you can make that specify how you wish to enter and exit a trade. The various types and their definitions are as follows:

Entries:

  • Market order – buy or sell at the best current available price
  • Limit entry – buy below the market or sell above the market at your desired price (buy limit or sell limit)
  • Stop entry – buy above the market or sell below the market at your desired price (buy stop or sell stop)

Exits:

  • Stop loss – automatically exit the market at a desired price that against your favour, e.g. above a sell position or below a buy position
  • Trailing stop – a stop loss that moves as the price fluctuates a certain amount in your favour
  • Take profit – automatically exit the market at a desired price that is in your favour, e.g. below a sell position or above a buy position 

 

Knowing when and how to use these market orders can make a huge impact on your success when trading on the market. 

About the author

Alice Instone-Brewer

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