There are eight currencies that are known in forex circles as “The Majors”. They are:
- S. Dollar (USD)
- European Euro (EUR)
- Japanese Yen (JPY)
- British Pound (GBP)
- Swiss Franc (CHF)
- Canadian Dollar (CAD)
- Australian/New Zealand Dollar (AUD/NZD)
- South African Rand (ZAR)
These currencies are called the Majors because they offer the best trading conditions for investors. Some reasons for this are:
- These currencies have high liquidity.
- The currencies are associated with countries that have significant financial power in the global economy.
- They conduct a high volume of trade with each other.
All of this means they have lower bid-ask spreads than other pairs. The following combinations of “major” currency pairs are among the best for meeting all these conditions:
The most widely traded currency, as you might expect, is the U.S. dollar. This is due to the size of the U.S. economy as well as the fact that the U.S. dollar is the preferred reference for most of the currency transactions done worldwide. The U.S. dollar is also the dominant reserve currency in the world which means that many foreign governments and institutions hold a significant amount of U.S. dollars as part of their foreign exchange reserves.
All of this does not mean that forex traders should never consider trading exotic currency pairs. However, doing so is usually left to natives of a particular country who are familiar with the economic and political issues in that country.
How to Start Trading in the Forex Market?
The first thing an individual investor will need is to open an account. There are a variety of forex brokers who will allow an investor to become a forex trader. Investing in the foreign exchange market contains risk and some investors may need to review many forex trading strategies and even forex brokers before making a final decision on where to open an account.
Many of these brokers will provide a trading platform with free forex charting software for clients with trading accounts that are open and funded. In many cases, these software programs allow forex traders to establish a demo account.
The charting software is a key technical analysis tool for the forex trader. Forex charts present information that allows traders to analyze a currency pair. Remember, every forex trade requires a buyer who is purchasing one currency and a seller who is selling another. In order to execute a successful trade, investors need to know how much one currency in a pair is worth in relation to the currency they want to trade. On a forex chart, a currency pair will be listed similar to this:
EUR USD 1.28
This means that one Euro is worth $1.28. In this example, the base currency (the currency to be sold) is the Euro and the U.S. dollar is what is called the counter currency.
Forex charts allow traders to customize settings for technical indicators that are indicative of short-term price movement such as current price, volume, and open interest. The basic types of technical indicators include overlays (e.g. moving averages and Bollinger Bands) and oscillators (e.g. MACD, RSI).
For investors who are truly seeking to trade the forex market as a career, another good step would be to join a forex club. These clubs, which can be formal or informal, help provide education and a source of networking for club members. All members of a forex club are bound by the principles of the FX Global Code which helps ensure a transparent and global forex market.