When trading Forex, it’s essential to understand that we deal with currencies rather than physical commodities. While currencies function as goods in their own right, trading them online means you never physically handle the money—until you withdraw your profits.

The concept behind forex trading is straightforward. If you anticipate that a currency’s value will increase, you buy it using another currency and hold onto it until you’re satisfied with your gains. Conversely, if you predict a decline in value, you sell it. Every forex transaction involves an exchange—purchasing one currency while simultaneously selling another. For example, if you buy the USD/JPY pair, you’re acquiring US dollars while selling Japanese yen. The same principle applies when selling a currency pair—you sell the first currency and buy the second.

Understanding Currency Pairs

Currencies are always traded in pairs, much like two boxers in an ongoing match, each striving for dominance. Sometimes one currency is stronger, sometimes weaker, and there are periods of stability followed by rapid movements.

Each currency is represented by a three-letter symbol:

• The first two letters denote the country (e.g., “US” for the United States).
• The third letter represents the currency (e.g., “D” for Dollar in USD).

The Three Main Types of Currency Pairs

Forex pairs are categorized into three main types:

1. Major Pairs – These are the most frequently traded currency pairs worldwide. They all include the US dollar and represent the most liquid markets. Examples include:

   • GBP/USD (British Pound/US Dollar)
   • USD/JPY (US Dollar/Japanese Yen)
   • EUR/USD (Euro/US Dollar)

   In our next lesson, we’ll explore the eight major currency pairs in detail.

2. Cross Currency Pairs (Crosses) – These pairs exclude the US dollar. Instead, they involve direct exchanges between other major currencies. For example:

   • EUR/GBP (Euro/British Pound)
   • AUD/JPY (Australian Dollar/Japanese Yen)

3. Exotic Currency Pairs – These pairs consist of a major currency paired with a currency from a developing economy. They are typically traded in lower volumes and often come with higher brokerage fees. Examples include:

   • GBP/THB (British Pound/Thai Baht)
   • USD/ZAR (US Dollar/South African Rand)

4. Other Instruments Traded in Forex Markets

   Besides currency pairs, traders also engage in:

   • Commodities (Gold, Silver, Oil)
   • Indices (S&P 500, NASDAQ)
   • Cryptocurrencies (Bitcoin, Ethereum – on some Forex platforms)

By understanding how forex pairs function, traders can make more informed decisions when entering and exiting the market. In the next lesson, we’ll take a closer look at major currency pairs and how they influence global trading.