Beginners Guide to FX

Here at FX Strategy we aim to bring you the latest news and FX strategy from all corners of the globe. Opportunities present themselves in all sorts of places and in all sorts of ways so we believe it is important to be on top of everything.

However, that doesn’t mean that all FX Strategy members have to follow such a broad array of data and indeed there is a good argument for specialising and becoming an expert in a limited number of currency pairs. Likewise, when you’re starting out, like most things it’s better to start small and focus on getting just a few things right.

There are over 60 currency pairs available to trade. If you’re new to FX you might want to try focusing on just a few important macro factors and a few major currencies. Major currencies generally refer to the most traded currencies which are the USD, EUR, JPY, GBP, CHF and AUD. Some of the most significant drivers of FX rates for example include interest rates, economic growth rates, inflation rates and the oil price.

Say you have the view that the USA is going to re-enter a recession. This in turn may lead you to expect the oil price to drop. You could trade this view by selling currencies linked to oil such as the Norwegian Krone.

(Next week we’ll be looking at the opposite situation - a strengthening US economy – which from much of the recent data appears to be the trend – and what that means for the USD)

Another example would be if you had the view that Japan was going to raise interest rates. Your strategy might then lead you to buy JPY on the assumption that the currency will strengthen.

Another important stage in your FX strategy development is to determine how much your trading strategy will be based on fundamental and/or technical signals. Here at FX Strategy we cater to both fundamental and technical analysis (although this particular column just focuses on fundamental analysis). Some traders sit purely in one camp or the other, however many traders use a mixture of both fundamental and technical analysis – over time new traders will develop their own style based on what works for them.

And just in case you’re wondering why one currency is quoted before the other, here is the answer. The first currency quoted is what is known as the “base currency”, while the second currency is the “counter or quoted currency”.

Due to historical covenants, when a commonwealth currency is involved, it is by default always the base currency. The Euro has also become a base currency. So that’s why you see pairs quoted as GBP:USD and EUR:USD rather than the reverse.