Forex Trading Basics: Currency, CFDs, Margin Trading | Inveslo

Start with the Basics

Understand forex trading basics with this beginner’s guide to forex. Learn about currency pairs, trading terminology, and leverage & margin trading.

Inveslo forex basics
Inveslo forex basics

Currency pairs are divided into three groups based on their characteristics in the market.

The most commonly traded pairs with the US dollar on one side are called the majors representing more than 60% of the daily FX trading volume. Majors are characterized by:

  • Being very liquid,
  • Having less volatility than other pairs,
  • Being less vulnerable to manipulate,
  • Involving low transaction costs
currency pair types

The major currency pairs

Majors Currency pair Nickname
EUR/USD Euro against the US dollar Euro
USD/JPY US Dollar against the Japanese yen Gopher
GBP/USD British Pound against the US dollar Cable or Sterlingd
USD/CHF US Dollar against the Swiss franc Swissie
USD/CAD US Dollar against the Canadian dollar Loonie
AUD/USD Australian dollar against the US dollar Aussie
NZD/USD New Zealand dollar against the US dollar Kiwi

Currency pairs that do not involve the US dollar are called Crosses or minor currency pairs. They are riskier to trade than majors because of the characteristics they share:

  • Being less liquid than majors.
  • Being more volatile than majors
  • Being vulnerable to manipulate
  • Involving higher transaction costs than majors
cross currency pair
Some of the most traded minor currency pairs
Crosses Currency pair
EUR/GBP Euro against British Pound
EUR/JPY Euro against Japanese Yen
EUR/CHF Euro against Swiss Franc
EUR/CAD Euro against Canadian Dollar
AUD/JPY Australian Dollar against Japanese Yen
AUD/NZD Australian Dollar against New Zealand Dollar
GBP/JPY British Pound against Japanese Yen
NZD/JPY New Zealand Dollar against Japanese Yen
NZD/CHF New Zealand Dollar against Swiss Franc
GBP/AUD British Pound against Australian Dollar

Exotics are the group of currency pairs that involve at least one currency from a small country or emerging economy. Exotics associated with higher risk as they are known as susceptible pairs to sudden economic and political changes. They are also featured by:

  • Not being very liquid,
  • Being very volatile compared to other groups,
  • Being susceptible to manipulation,
  • Carrying considerably higher transaction costs.
Some of the most exotic currency pairs
Exotics Currency pair
EUR/TRY Euro against Turkish Lira
USD/TRY US Dollar against Turkish Lira
USD/INR US dollar against the Indian rupee
USD/NOK US Dollar against Norwegian Krone
USD/DKK US Dollar against Danish Krone
USD/ZAR US Dollar against South African Rand
USD/THB US Dollar against Thailand Baht
USD/SGD US Dollar against Singapore Dollar
USD/SEK US Dollar against Swedish Krona
USD/MXN US Dollar against Mexican Peso

CFD is short for Contract for Difference and refers to the type of trading instruments obtaining their value from an underlying asset. CFDs are popular speculative tools that allow traders to participate in asset price movements without fully owning the underlying asset.

Types of CFDs

CFDs are categorized into five groups depending on their underlying asset as follows:

  • Forex like EUR/USD, GBP/JPY, etc.
  • CFDs on commodities like spot metals, gas, and oil.
  • CFDs on cryptocurrencies like bitcoin, ethereum, and more.
  • CFDs on indices like S&P500, DAX30, and more.
  • CFDs on shares like Apple, Microsoft, Tesla, and more.
CFDs Inveslo

These exceptional features of CFDs make them very popular for trading:

Access to a huge range of markets

With CFDs trading, you can participate in many different markets like equities, commodities, spot metals, cryptocurrencies, and forex on one trading platform without having to own physical assets.

cfds trading
cfds market

Trade on both market directions

CFDs can provide very flexible trading opportunities as they can be traded on both rising and falling markets. If you expect the value of an underlying asset to grow, you can buy a certain number of CFD on that asset or go long. Vice versa, if you think the asset price will crash, you can sell its CFD or go short. So, CFDs give you an opportunity to profits in both directions.

Trade small contract sizes

CFDs trading is possible on a fraction of the underlying asset, which means you can enter the market with smaller amounts of money. So, CFD trading is cheaper than trading the underlying asset while it provides you with the same opportunities to profit.

cfds trading
margin trading inveslo

Margin trading

You can use leverage when trading CFDs. Leverage increases exposure on a trade for a certain amount of capital that can magnify profits. However, the leverage also increases the trader's risk.