Currency Exchange: The Trading Mechanics In The Market

Currency Exchange: The Trading Mechanics In The Market

Depending on the global market conditions, the currency exchange fluctuates on account of several other factors resulting to changes in the exchange rates of different currencies. Investors or traders take advantage of these fluctuations similar to what is being done in the  decentralized trading stock market. Just with stock trading, investors attempt to make a profit from the fluctuations by buying a certain currency when it is at its lowest and selling it when its value increases. Also known as the forex (foreign exchange) market, currency exchange operates on a global scale through a worldwide-decentralized financial system. This decentralized market allows for financial centers to be located in different countries that offer services around the clock from Mondays to Fridays.

Simultaneous buy and sell

In each foreign exchange trading transaction, a simultaneous buy and sell has been made, that is, purchasing a certain currency automatically results to a corresponding sale of another currency, hence, the term exchange. This scenario is different from a typical stock market transaction wherein buying 1000 shares of Google would simply mean that the investor owns that 1000 shares and simply waits for the value to go up before selling it.

The major paired currencies

Due to the nature of how the currency exchange is carried out, the traded currencies come in pairs. These pairings combine two different currencies being traded against each other. In theory, all types of currencies from different countries can be traded in the foreign exchange market. However, only those currencies belonging to countries with bigger and stable economies are typically traded.

Seven major currency pairs involve the United States dollar on either side of the deal. Using ISO formalities, the most common currency pair is the EUR/USD, which trades the currencies between the countries in the European Union and the United States. Its long name is equivalently the Euro-dollar. The second most frequently traded pair is the USD/JPY, also known as the Dollar-yen, which trades the currencies of the United States and Japan. The British pound sterling (GBP), the Swiss franc (CHF), the Canadian dollar (CAD), the Australian dollar (AUD), and the New Zealand dollar (NZD) constitutes the remaining five major paired currencies.

The major paired cross-currencies

When the US dollar is not included in the exchange, the pair is referred to as a cross-currency. Six cross-currency pairs are actively traded in the currency exchange market. To take advantage of the high liquidity of the market, investors exclusively consider the most actively traded pairs and disregard the others.

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