Chapter 2: What Is Traded In Forex?
In the world of Forex, currencies are the key assets being traded. But how exactly does one trade currency, and what makes it valuable? Let’s break it down from an investor’s perspective.
Currencies as Investments
When you buy a currency—let’s say the Japanese yen (JPY)—you’re essentially purchasing a stake in the Japanese economy. You’re expressing confidence in the strength and future performance of Japan’s financial system. Just as buying stocks in a company reflects your belief in its growth, purchasing a currency reflects your belief in the country’s economy.
Now, when you decide to sell that currency—hopefully at a higher price than you paid—you’re aiming to make a profit. This is similar to selling stocks at a profit. The key here is predicting how the value of one currency will change relative to another. This exchange rate is driven by factors like economic growth, inflation, interest rates, and global market trends.
The Major Currencies
In the Forex market, there’s a group of currencies that are considered the “major currencies.” These are the heavyweights of the Forex world and come from some of the largest economies globally. They include the U.S. Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), and the Swiss Franc (CHF). These currencies are the most widely traded, with liquidity and volatilityThe degree of price fluctuations in a market or currency pair over a period of time. that make them attractive to investors.
While some traders prefer to stick strictly to these currencies, others—like us—take a more inclusive approach. Many consider currencies like the Australian Dollar (AUD), New Zealand Dollar (NZD), and Canadian Dollar (CAD) as “commodity currencies.” In our view, they deserve the “major” label as well. After all, these currencies play a significant role in the global market.
Currency Symbols: The Three-Letter Code
Each currency has a symbol—a three-letter code that helps you easily identify it. The first two letters typically represent the country, and the third letter represents the currency itself. These codes are known as ISO 4217 Currency Codes, established in 1973 by the International Organization for Standardization (ISO). This system ensures that everyone in the Forex market uses the same currency identifiers.
For example, take NZD. “NZ” stands for New Zealand, and “D” represents the dollar, so NZD stands for the New Zealand Dollar. Simple, right?
The Bottom Line
The major currencies are the backbone of the Forex market. They’re the most traded, heavily analyzed, and closely tied to the global economy. By understanding the dynamics behind currency trading and recognizing the symbols that represent these currencies, you’re better prepared to make informed decisions in the market.