After an introduction to CFD trading, getting to know what CFD trading on the main forex pairs and indices is, follows. But first, what is a forex pair, how does it work and what is an index?
What is a forex pair?
Forex is nothing more than the exchange of foreign currencies (hence the name: forex). When we go on a trip to a place where our country’s currency is not used, we have to exchange our currency for the destination country’s currency. For example, if we live in the USA and we go on holiday to Spain, we will have to exchange US dollars (USD) for euros (EUR). So, the question is, how many euros can I purchase with 1 dollar? The answer will depend on the exchange rate at the time.
Forex trading involves speculating on the prices of two currencies. The currency that appears first is the base currency (value 1) and the second one is the quote currency. Following the example of the US and Spain, dollar/euro, the dollar would be the base currency and the euro the quote currency. In forex trading, the question would be how many euros do we need to purchase one dollar? In this case, the answer is the same, it depends on the exchange rate at the time. Therefore, when trading CFDs on forex, traders speculate on the price change of one currency over another. And, of course, this kind of trading allows traders to open both long and short positions.
What are the main Forex pairs?
Forex pairs can be classified into three main groups: major, minor, and exotic currency pairs.
Major forex pairs are those that contain the US dollar as either the base or the quoted currency. This group is one of the most traded in the market. The major forex pairs include Euro/Dollar (EUR/USD), Dollar/Japanese Yen (USD/JPY), Pound Sterling/Dollar (GBP/USD), Dollar/Swiss Franc (USD/CHF), Dollar/Canadian Dollar (USD/CAD), Australian Dollar/Dollar (AUD/EUR) and New Zealand Dollar/Dollar (NZD/USD).
Fun Fact: Many major currencies have got nicknames. The pound sterling (GBP) is called the Cable, the Canadian dollar (CAD) Loonie, the New Zealand dollar (NZD) Kiwi, and the US dollar (USD) Buck.
Minor pairs or crosses are those formed by the major pairs excluding the US dollar. This includes all possible crosses with the Euro (EUR), Pound Sterling (GBP), Australian Dollar (AUD), New Zealand Dollar (NZD), Canadian Dollar (CAD), and Swiss Franc (CHF), as well as their crosses with the Japanese Yen (JPY). Here are some examples: EUR/GBP, EUR/AUD, EUR/NZD, EUR/JPY, EUR/CAD, EURO/CHF, GBP/CHF etc.
The last group, includes the exotic pairs. These are the currencies of emerging economies or weaker currencies. Some examples include the euro/Turkish lira (EUR/TRY), US dollar/South African rand (USD/ZAR), US dollar/Colombian peso (USD/COP), the Polish zloty, or the Hungarian franc, etc.
Most novice forex traders usually start with the major pairs. The bid and ask price offered by this group is usually very close and their liquidity in the market is higher due to the stability of the economies they represent. As more experience is gained, the range of trading is extended to the minor pairs, and finally to the exotics. The latter group is highly volatile due to the instability of the economies they represent and the currencies’ low liquidity.
The most prominent indices
Some of the most preferred assets for CFD trading – are indices. Indices are economic indicators that represent the value of the shares of the companies that make up the index.
The indices can be made up by technology companies such as the Nasdaq (UT100) or the most important companies of a country listed on the stock exchange such as the SP&500 (US500) in the USA, the Ibex35 (ES35) in Spain, the Nikkei (JP225) in Japan, the German Dax (DE30), the France40 (FRA40) in France or the HSI (HK50) in China. An index can also be made of the most important companies listed on a country’s stock exchange, as is the case with the Dow Jones (US30).
In short, indices measure the economic activity of a country, a sector of industry, or a group of companies within a single stock market. The main indices’ group includes the indices that are connected to large world economies.
How to trade indices
The main indices are those of world economies such as the ones mentioned above. The value represented by the index is a weighted average of the price of the shares it represents. The price of the companies they represent is determined by the economic decisions taken by each of the corporations that make up the index, as well as the political decisions of the country and the socio-economic situation of the population.
Therefore, when trading an index, the sector of the index must be taken into account. If it is technology, for example, you have to take into account the regulation of the sector, the economic movements of the companies that make up the index – capital increases, the launch of other products, mergers, acquisitions, publication of quarterly results, forecasts, etc. -, the political decisions regarding the index, and finally, the socio-economic situation of the population. Continuing with the same example, the COVID19 pandemic, with global confinements, has favored technology companies because many have increased their consumption of streaming platforms and online shopping. These circumstances led Nasdaq to perform well especially at the end of 2020.
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