Forex trading has really taken off in recent years and will continue to grow in the near future, so whether you’re looking to pick up a new skill or you’re looking to develop your skillset and become better at trading, there’s always room for growth and improvement!
If you have always wanted to trade forex, the first step would be to hone your skills further and acquire the right knowledge on what currency pairs work best with one another, which currency pair to take advantage of, and how to know when a currency is at its strongest. You might then be wondering; should you only bother trading strong currencies? Keep reading below to find out!
What Currency Pairs are There to Trade?
Before we get into what defines a ‘strong’ currency and whether or not you should try and grow your skills in that area alone, it’s worth knowing what tradable currencies and currency pairs are around, to begin with!
Put simply, the number of tradable currencies is based on the number of currencies that are currently circulating in the world. Meaning that the combination of currency pairs is endless. The thought of the number of currencies at the moment might scare you, but there’s a way to simplify things even further.
You’ll be comforted to know that the vast majority of trade that is done on the forex market is usually narrowed down to about eighteen different currencies, and to break that down even further within that category, the most popular currency pairs are narrowed down to about eight. These include:
- British Pound (GBP)
- Swiss Franc (CHF)
- U.S Dollar (USD)
- Japanese Yen (JPY)
- Canadian Dollar (CAD)
- Australian Dollar (AUD)
- New Zealand Dollar (NZD)
- Euro (EUR)
With this in mind, it might be worth starting off by strengthening your knowledge about these eight currencies in particular, and the narrowed-down list definitely makes the task much more manageable before you start venturing out further and learning about trading other currencies.
What Makes a Strong or Weak Currency?
The next thing to consider is, what actually determines whether a particular currency is strong or not, and how does it do that?
The implication behind the word ‘strong’ is usually one that means that something is better than another. So when we hear the phrase ‘strong currency,’ it is natural to assume that the particular currency must be better in terms of exchange and trade over another currency.
However, determining a country’s value is a little more complex than just its strength. Both words ‘stronger’ and ‘weaker’ are usually used in relation to how a currency is doing in comparison to another currency. Many currencies are valued against the U.S dollar, for instance, because it is one of the most liquid currencies on the forex market.
A specific currency increases in strength or becomes stronger when it is able to buy more foreign currency than before. Similarly, the currency of a country weakens or becomes weaker when it is not able to buy as much foreign currency in comparison to before.
What Can Determine How Strong a Currency Is?
As expected, there is no one particular factor that determines how strong or weak a country’s currency is at any given time, but there are some more prominent factors than others that can help you understand this a little better.
You’ve probably heard of the economic terms supply and demand being used, and it is something that is applicable within the forex market as well. There are three core elements within the forex market amongst others, and these three, in particular, are made up of the supply, demand for that supply, and last but not least, a market price.
The supply is made up of the currency being sold in the market, and demand for that currency is created as more and more buyers purchase a particular currency. Much like other markets where supply and demand are used, here, the amount of supply shifts as the demand does, impacting the prices.
If we use the example of the U.S dollar once again, we might say that when the demand for the dollar increases in comparison to the demand for the Euro, then the currency of the dollar will become ‘stronger’, and in contrast, the Euro currency will become ‘weaker’.
Just because it becomes weaker doesn’t mean that it’s not worth trading with Euros. It simply means that at that particular moment, there is a greater demand for the US dollar than for the Euro, and this is something that continuously fluctuates.