Forex Lesson-2 Trading instruments
It’s time to learn more about the assets you can trade. Where to start? Let’s go step by step.
It’s possible to make money by buying and selling various currencies. The fact that each currency floats, or falls and rises against the value of another currency, is the reason why foreign exchange trading has grown to be one of the biggest businesses on the planet, with a daily turnover of over 5 trillion dollars.
You probably already know that because of your own experience. When you want to travel abroad, you buy the currency of the country you are visiting. Now, of course, you can pay by card – in this case, the exchange operations will be performed by the bank and you will see only the resulting changes in your account balance. Still, currency exchange will take place anyway. In addition, people often buy a foreign currency, the euro or the US dollar, in particular, to save money and get insurance from inflation in their local currency.
One currency is always traded versus another. Together they are called a currency pair.
Have a look at the most popular pair, EUR/USD. The euro stands in the first place and is called the base currency. If the quote for EUR/USD is 1.20, it means that 1 euro costs 1.20 dollars – 1 dollar and 20 cents (the USD is the quote currency or the counter currency).
The places occupied by currencies in a pair are standard. You will get used to them very soon. For other pairs, the situation is similar: the currency in the first place is priced in the currency, which is in the second place.
Remember that if the base currency appreciates, the pair moves up. Alternatively, if the quote currency appreciates, the pair moves down. If the EUR strengthens, EUR/USD rises. If the USD strengthens, EUR/USD falls.
Look at the chart below. EUR/USD dropped sharply on June 16. What was the reason? The Federal Reserve (the US central bank) held a meeting that day. The bank claimed that it would start decreasing its financial support as the US economy recovered from the Covid-19 pandemic faster than expected. Good news for the USD! As a result, EUR/USD was falling for 3 days in a row!
An economic calendar is a key tool that helps traders not to miss important events. You can find it on our website.
Absolutely! Still, let us give you some details. Compare the forecasts with the actual data in the economic calendar. If the actual number is greater than expected, the currency will rise. If it’s worse – the currency will fall. The only exception is unemployment and similar indicators: for them, the higher the reading, the worse for the currency.
Yet, the outcome is not always predictable. Sometimes, if the forecasts listed in the calendar are too optimistic, traders will price in the good outcome even before the release itself and by that push the currency’s price up. However, when the results become known, and they are not too exciting, the price falls. Traders even have a name for this occasion – ‘buy the rumor, sell the fact’.
Below you will find the list of pairs, which are called ‘Forex majors’. Have a look at them and tell: what do they have in common?
EUR/USD
GBP/USD
USD/JPY
USD/CHF
AUD/USD
NZD/USD
USD/CAD
Exactly! Forex majors contain the USD. The second currency in each of the pairs above stands for a common currency that belongs to one of the world’s most developed economies. In other words, Forex majors represent reliable and popular currencies. Together they account for about 75% of all trades – hence the name.
Traders prefer major pairs for a reason: these trade instruments have higher liquidity than other currency pairs.
It means that these pairs have the biggest trading volume, move dynamically, and trading them is the cheapest.
It may be difficult to guess from the name of this group, but it consists of currency pairs made of major currencies other than the US dollar. It can’t be the USD all the time, right? Before trading these currencies was possible directly, they had to be converted through the American dollar. Traders had to make two transactions and could sustain losses. With time, cross pairs have become common and now you can find them in all trading apps. Here are some of the crosses:
EUR/GBP
EUR/JPY
CHF/JPY
GBP/AUD
EUR/NZD
CAD/JPY
If, for some reason, you have trouble with the analysis of the US dollar or the USD simply isn’t very active, cross currency pairs are your best choice. Trading conditions are also good because currencies like EUR, GBP, JPY, CHF, NZD, AUD, and CAD are also popular and offer high liquidity.
If you look at the chart below, you’ll see CAD/JPY. Canada is one the largest oil exporters in the entire world, that’s why when crude oil loses its value, the Canadian dollar falls as well.
Remember that oil prices and the Canadian dollar tend to move in the same direction.
On August 11, Energy Information Administration published a worse-than-expected oil report and triggered the sell-off of oil assets. Thus, the Canadian dollar dipped, and CAD/JPY went down as well.
You can certainty perceive exotic currencies this way. Generally, one currency used here is a popular one like the USD, and the other one – a rare currency, usually a currency of a developing or emerging economy, for example, Mexican peso or Brazilian real. Check the list of exotic pairs:
USD/THB
EUR/TRY
USD/ZAR
USD/BRL
CNH/JPY
USD/RUB
USD/BRL
Usually, these pairs are more volatile, i.e. prone to big movements because of the actions policymakers make. For example, on March 22, the Turkish lira fell by 15% after President Recep Tayyip Erdogan sacked the country’s central bank governor. Such moves provide opportunities for traders, but also create risks. There can also be long and strong trends – a thing that can be of great interest to traders because they can ride these trends. At the same time, the costs for trading exotic currencies can be higher because of the lower liquidity. Overall, everything depends on your trading style and the strategies you use.
To find gold in the trading terminal, look for XAU/USD – this is how gold is marked. The metal is just like currencies, which are traded against the USD, although there are specific factors, which drive gold’s price.
Trading gold and investing in precious metals goes back centuries. People used to buy gold when they wanted to preserve money and they still do so. Gold has been there for a long time and will remain with us in the future. That’s why when market players seek safety or want to safeguard their funds from inflation, they buy gold. On the contrary, when the economy is booming and traders have a growing appetite for risk, they tend to sell gold making its price decline.
It’s necessary to monitor market news and analysis. You can open both buy and sell trades in gold.
On August 6, XAU/USD fell sharply. Why? The USA has revealed better-than-expected labor data: Nonfarm payrolls or NFP. It’s one of the most impactful economic reports for traders. It shows how many Americans have found jobs in the previous month, excluding the farming industry.
Well, the USD and gold have an inverse relation. When the USD rises, gold tends to fall, and vice versa, as the USD is a quote currency in XAU/USD. Thus, the strong NFP pushed the USD up and gold down.
Oil is another asset popular among traders all over the world. Large players trade oil at commodity futures exchanges. Individual traders can also open buy and sell trades on oil with the help of specific financial instruments.
Oil prices move up and down because of oil supply (how much oil is extracted and brought to the market) and demand (how much oil economies need and buy). The two main benchmarks (types) of oil are Brent and WTI. In the trading software, they go under the names XBR/USD and XTI/USD. Both assets tend to move in the same direction, but the actual price levels differ because these oil blends are produced in different regions of the world.
Oil prices were touching the dips in April 2020 amid the Covid-19 outbreak. It was crazy! Some oil futures contracts turned negative. Sellers were paying buyers to take the stuff off their hands. Such a situation occurred because the US economy was on lockdown and, as a result, there was so much unused oil that America was running out of places to store it. In the chart below, you can observe the oil market crash and its recovery in 2021.
Don’t worry! You are just starting your journey. By the way, when some promising assets are at the lows, traders say ‘buy the dips’. It is one of the favorite phrases among them. The idea is to buy the undervalued assets that have a high potential to grow in the future to sell them for higher prices later.
A stock market index is used to describe the performance of a country’s stock market or a specific portion of it.
For example, the S&P 500 shows how the stocks of large US companies are performing as a whole. NASDAQ contains information about large technology companies.
When you trade an index, your position is not affected by the news about individual firms. You will look at the business conditions in a country. If interest rates are low, the government supports businesses, and the economic and political environment is stable, then the indices will likely rise. If you look at the long-term charts, American stocks have always been trending upwards.
That’s right! A stock index is an already well-diversified portfolio. Diversification is one of the main pillars of stock trading. It simply means having a range of various assets to minimize the risks of unexpected price movements of an individual asset. Therefore, indices are more sustained to unexpected market shocks than individual stocks and thus considered as low-risk investments.
You can see the S&P 500 index (US500) in the picture below. It rises and rises no matter what. It dropped for a short time when the Covid-19 outbreak happened. However, after that, it has managed not only to return to pre-pandemic levels but also to overrun them!
With FBS, you can buy and sell stocks as well!
The dynamics of stock price depends on the financial results and other news related to that particular company. For example, Tesla stock will likely jump when the company announces a new model.
To predict stock moves successfully, you need to check company earnings reports available in the economic calendar as well as the news feed on the FBS website.
On November 17, 2020, it was announced that Tesla was set to join S&P 500 index on December 21, 2020. The stock price rocketed from $410 to $650 and gained 60% during that period. In the next month, the price moved even higher and reached $880. The overall jump was 114%.
Cryptocurrency is going mainstream — and becoming increasingly difficult for investors to ignore. A cryptocurrency (crypto) is a digital currency that is used to buy goods and services and is secured by cryptography. Most cryptocurrencies are decentralized networks based on blockchain technology. The most well-known cryptocurrencies are Bitcoin, Ethereum, XRP, Litecoin, etc.
There are several reasons. First, most investors believe it has a huge potential to grow. Crypto is usually seen as the currency of the future and people want to possess this asset just in case. What if it rockets one day? No one would want to be left aside.
Second, there is no control of authorities. Cryptocurrencies are not controlled by any central bank that makes them more attractive in times of high inflation. Inflation reduces the value of the fiat money like the USD or the EUR, while BTC doesn’t suffer from inflation.
Third, safety. A cryptocurrency is secured by cryptography, which makes it nearly impossible to fake or double-spend. It’s said that crypto can be more secure than traditional payment systems.
You can invest in crypto, trade it, or use both approaches. Investing is a buy-and-hold approach: investors buy the most promising cryptocurrencies, wait for some time, and then sell them at a higher price. Unlike investing, trading is a short-term approach. Traders earn on price changes during a day, several hours, or even minutes. Just like trading currency pairs! Notice that cryptocurrencies tend to be more volatile than other Forex assets, so it’s necessary to be careful and manage risks.
- There are various trade instruments available for online trading: currency pairs, metals, oil, indices, stocks, and cryptocurrencies.
- Every type of financial asset is driven by specific factors.
- You can diversify your trading by picking different instruments.
Keep up! In the next lesson, you will learn how to make your first test trade.
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