Currency exchange rates are a crucial component of global trade. They determine how much money you need to buy a product in one country and sell it in another.
Exchange rates fluctuate almost daily, based on a variety of factors. They’re influenced by the strength of a nation’s economy and global trade.
Currency Pairs
Currency pairs measure the value of one currency compared to another. Each pair has a base currency (first named) and a quote currency (secondary name).
Currency values rise and fall against each other due to economic, geopolitical and technical factors. They are also influenced by inflation rates.
Major currency pairs include EURUSD, GBPUSD, USDCHF, USDJPY, AUDUSD and NZDUSD. These pairs are the most traded in the forex market, and trading on them represents about 80% of the entire foreign exchange market.
Other currency pairs are referred to as minor currencies or crosses. These currency pairings have wider spreads and a lower amount of liquidity than the majors, but are still liquid markets nonetheless.
Charting Tools
Forex charts are a crucial tool for speculative traders, as they can help them determine when a currency pair is likely to rise or fall in value against another. The charts are typically depicted in two dimensions – time and exchange rate values.
The x-axis shows the time period, while the y-axis displays exchange rates. Charts are used by all types of traders, even those with a purely fundamental focus on a specific currency pair.
Line and candlestick charts are the most common types of forex charts. Line charts are primarily used to show closing prices, while candlesticks are more useful for displaying opening and highest/lowest price points.
Trading Platforms
Trading platforms are computer systems that enable investors to open, manage and close financial trading positions in the market. They typically stream live quotes of tradable assets and include charting tools, news feeds and other market research information.
Forex exchange rates are determined in a professional interbank market that connects currency traders from banks around the world. The market is open 24 hours a day, thanks to global cooperation among traders.
A trader may place orders to buy or sell a currency at a bid-ask spread, which is the difference between the amount that buyers are willing to pay and the minimum amount that sellers require to sell. The size of lots that forex traders use for trading are typically 100,000 units, though micro (1,000) and mini (10,000) lots are also available.
Choosing a good trading platform involves considering several factors, including broker reputation and fees. It should support innovative order types and provide fast trade execution at all times. It should also feature a one-stop shop for a variety of tradable asset classes, such as forex, stocks, commodities and indices.
Risk Management
The risk of volatility in the FOREX market is one of the most serious concerns facing business executives engaged in international trade. This is especially true in recent years, with events like the COVID-19 pandemic and the U.S.-China trade war causing exchange rates to fluctuate dramatically.
The good news is that there are ways to mitigate this risk and protect your company from potential losses. First, finance teams must identify FX risk exposures and evaluate their impact on the business.
Second, they should determine how a currency change will affect cash flow and earnings at risk (EaR). Third, they should explore hedging strategies that are tailored to the specific risks of their organization.
Risk management is an essential part of any treasury and foreign exchange banking solution. It helps ensure that the company’s resources are used effectively and efficiently to minimize the effects of risk.