For newcomers to the world of currency trading, the first concept to grasp is that no one buys physical currencies or securities denominated in the coin of a foreign realm. A retail forex trader buys a position in a currency pair, and, depending on how he positions his trade, he will always be “long” in one currency and “short” in the other. There are no “tick” rules or restrictions related to short selling in the forex world for this very reason.
The nuances, however, of each pair must also be learned and accommodated before developing the all-important forex trading strategy for each one. Beginners are often counseled to focus on one or two pairs, preferably the “majors”, before branching out to other choices in order to understand the unique attributes of each relative to liquidity, spreads, daily volatility, and timing issues. The “majors” are comprised of the seven major currencies versus the Dollar, and the “crosses” refer to those same pairings where the Dollar is excluded.
These major symbols and abbreviations must be committed to memory:
AUD – Australian Dollar (or “Aussie”)
CAD – Canadian Dollar (or “Loonie”)
EUR – Euro (or “€”)
JPY – Japanese Yen (or “¥”)
GBP – British Pound (or “Sterling” or “£”)
CHF – Swiss Franc (or “Swissie” or “S₣”)
NZD – New Zealand Dollar (or “Kiwi”)
USD – U.S. Dollar (or Greenback or “$US”)
The majors also account for 75% of daily volume turnover with breakdowns as follows:
Higher volume translates to higher liquidity and tighter spreads. Transaction times for “major” orders are measured in nanoseconds. Spreads for the “EUR USD” may be as low as 2 pips, where 3 to 4 apply to the Yen and Pound, and 4 to 5 pips prevail for the remaining pairs.
Volatility is often the guidepost employed by traders to signal where opportunities are most apparent. The majors and their crosses have varying trading ranges on a daily basis, influenced by “personality” differences. The diagram below provides a basis for comparison:
The current crisis in Europe has elevated the volatility of the Euro, which traditionally has been at the lower end of the spectrum. The British Pound, however, has always been known for its “fickleness” as a dance partner, displaying tendencies for severe reversals and whipsaw like pricing behavior. Novice traders will have better luck with the Euro where volumes are higher and changes in direction are less harsh. The Yen also falls into this “calmer” category and is highly recommended for beginners, as well. The Swiss Franc behaves similarly to the Euro, but it is also viewed as a “safe haven” due to the conservative nature of central banking officials in that country.
The remaining three “majors” are considered commodity currencies. The “AUD USD” pair correlates well with the S&P 500 and general hard commodity indexes. If coal, iron ore, and precious metals are doing well, then the Aussie is moving into positive ground versus the Dollar. The Canadian Loonie follows the travails of oil prices. Canada has the second largest oil reserves in the world, surpassed only by Saudi Arabia. Lastly, the Kiwi reacts to price flows in the agricultural products arena.
As for timing issues, the Yen is favored during the market sessions in Asia, which tend to be conservative and predictable in their movements. The real action begins when London opens. Pent up demand for Sterling can cause wild gyrations from the start. Trends begin in early morning and are exacerbated when New York opens, but the overlap can produce more volume with squeeze opportunities when London closes.