Many people choose to invest their money into stocks, but for those looking to diversify their portfolio, trading currencies offers another way to spread investments and reduce risk exposure. The forex market also offers huge opportunities to make big gains on trades, which attracts many people to the world of trading currencies.
Before you decide to jump into forex trading, it is a good idea to learn about how the market functions and understand the fundamentals. It will take some time and dedication until you are ready to trade currencies successfully, but once you figure out how it works, you can begin your journey trading in the forex market.
One of the best places to start is to learn about what currencies can be traded in this market. If you want to reduce your risk whilst trading currencies, it is a good idea to stick to the currencies that are traded most often. Below we will go through what the most traded currencies are in the forex market.
U.S. Dollar (USD)
The Federal Reserve was created in 1913 and functions as the United States’ body of central banking. It is run by several governors as well as someone that oversees the entire operation in the position of the chair. The United States has the largest economy in the world that uses the U.S. dollar as its currency.
Fundamentals of the economy, as well as employment and manufacturing reports and gross domestic product (GDP), all function to support the U.S. dollar. It can also be heavily influenced by policy changes surrounding interest rates as well as the central bank. The dollar functions as a benchmark that is traded against the other most-traded currencies, including the Japanese yen, the British pound, and the euro.
European Euro (EUR)
The Central Bank of Europe is located in Frankfurt, Germany, and functions as the central bank for all 19 countries that are a part of the eurozone. Similar to the central bank of the U.S., the European central bank has a single body that has the responsibility of making decisions relating to monetary policy. There is also an executive board that has four members, as well as a vice president and president. The members are carefully chosen and represent the four largest economies in the eurozone: The Netherlands, Spain, Italy, France, and Germany. The reason it is done this way is to make sure the biggest economies are properly represented in the event that changes are made to the administration. Meetings with the board are held every week for reviews and to make monetary policy decisions.
The European Central Bank is capable of issuing banknotes in the same way the Federal Reserve can in the United States. This is often done in the case of system or bank failures. The main goal of the European Central Bank is to maintain the stability of the euro with secondary goals of addressing policies affecting general economies. This means that most of the focus of the European Central Bank surrounds consumer inflation and places specific attention on decisions that affect interest rates.
In general, the price movement of the euro in the forex market is slower than the U.S. dollar when compared with other currencies, such as the Australian dollar or the British pound. If you take an average day in the forex market, you can expect the euro to trade somewhere between 70 to 80 pips. On days when there is increased volatility in the market, you can expect the euro up to 100 pips wide over the course of the entire day.
Japanese yen (JPY)
The Central Bank is known as the Bank of Japan and controls the third-largest economy in the world. It functions to control monetary policies, issues of currency, and operations relating to money in the market. The Japanese yen is a lot more volatile compared with other currencies, such as the euro or the U.S. dollar. On a normal trading day, you can expect the Japanese Yen to trade in the range between 70 and 140 pips. On especially volatile days, the currency can trade upwards of 200 pips. The best time to trade this currency is between U.S. and London hours, which is from 8 a.m. to 12 p.m. EST.
British pound (GBP)
The United Kingdom has its own central bank, known as the Bank of England, which functions in a similar fashion to the Federal Reserve of the United States. For those interested in how the British Pound trades, it is slightly more volatile compared with the euro and can be expected to trade with a wider range throughout the day. It has been known to trade within just 20 pips, but it is not uncommon to see it trade between 100 and 150 pips. The most volatile times for the British pound occur during U.S. and London times and are less volatile through the Asian hours.