Many of world’s countries have their own unique currency (like Pesso in Mexico) while some countries share a currency to simplify trading with key geographical partners (like Euro in Europe). Knowing how to read them is perhaps first skill you must have, before entering the market.
Simple Rule On How To Read Currency Pairs
Currencies are traded in pairs as their value is relative to one another. The pair system might seem daunting at first but it’s extremely simple – you will learn it the fastest on a real-time forex simulator.
The first currency shown is the controlling one in terms of placing your order. So if you see EUR/USD then you are always choosing to buy or sell the first currency (Euro) against the second currency (U.S. Dollar).
Majors are widely traded by beginners and professionals alike. This is because they have the most liquidity, lowest spreads and the broadest range of movements. Unlike small currencies, majors are generally more stable. The economic and political institutions of these nations are generally long established and predictable compared to other nations.
The crosses are any currency pair that doesn’t feature the USD and they do not hold any less profit potential than the majors. Too much US Dollar exposure can lead to all your trades heading in the same direction, a big problem if that direction is against you. Two examples of great crosses are GBP/AUD and EUR/CAD. They are both significant pairs which will provide you some shelter if you are uncertain about the direction of the USD.
The “Exotic” currency pairs are less traded and so much more costly to buy or sell. Don’t let the cost put you off, because many of the greatest traders of all time made their fortunes with exotics. For example, one of the 5 greatest forex traders, George Soros gained $800 million profit from selling Thai Baht (THB) in 1997 Asian crisis. In situations like these never shy away from great chances of success, just because fewer speculators are aiming at them. It just means you’ve outsmarted others.