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CHAPTER 2 - LESSON 1
The forex market involves the exchange of one currency for another, and this exchange is done through currency pairs. A currency pair is a pair of currencies that are traded against each other, and each currency in the pair is represented by a three-letter code. For example, the currency pair EUR/USD represents the exchange rate between the US dollar and the euro.
Exchange rates are the rates at which one currency can be exchanged for another. In the fx market, exchange rates are expressed as bid-ask spreads, which represent the difference between the price at which a currency can be bought (the ask price) and the price at which it can be sold (the bid price). The bid-ask spread is typically measured in pips, which is the smallest unit of price movement in the forex market.
Exchange rates are influenced by a wide range of economic, political, and social factors. Some of the most important factors that affect exchange rates include interest rates, inflation, economic growth, geopolitical events, and central bank policies. Understanding these factors and their impact on exchange rates is essential for successful forex trading.
When trading forex, it is important to choose the right currency pairs to trade. There are three main categories of currency pairs:
These are the most heavily traded currency pairs in the forex market, and they include the US dollar, Euro, Japanese yen, British pound, Swiss franc, and Canadian dollar. Major currency pairs typically have tight bid-ask spreads and high liquidity, which makes them popular among traders.
These are currency pairs that do not include the US dollar, and they are also referred to as cross-currency pairs. Examples of minor currency pairs include EUR/GBP, AUD/CAD, and NZD/JPY. Minor currency pairs typically have wider bid-ask spreads and lower liquidity than major currency pairs.
These are currency pairs that include one major currency and one currency from a developing country. Examples of exotic currency pairs include USD/ZAR, EUR/TRY, and GBP/MXN. Exotic currency pairs typically have wider bid-ask spreads and lower liquidity than major and minor currency pairs.
Understanding the factors that affect exchange rates and choosing the right currency pairs to trade are key components of successful trading.
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