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Let's take a brief look at the different categories of currencies in order to help you take more comfortable steps into the exciting online world of forex.

Have you ever tried trading forex? The great profit potential of this highly liquid and deep market has been fascinating traders since the earliest days of the retail online forex trading business. The forex trading scene is active, and exciting, with many different approaches to forex analysis and strategies springing up regularly, along with many automated tools and educational methodologies. But in spite of all the innovation, and fresh approaches, differentiating between the various currencies in the market, and identifying the advantages and disadvantages of trading them remains a crucial issue to be sorted out in the beginning of any trader’s career.

We’ll take a brief look at the different categories of currencies in this article in order to help you take more comfortable steps into this exciting online world.

Carry Trade

The carry trade is perhaps the most popular and common place strategy employed by beginning traders. In this method you simply buy a currency which pays a high interest rate, and finance your purchase by selling a currency which pays a lower rate. Since you pocket the difference between the two rates, your account registers an interest gain in addition to the profit from the appreciation of the currency pair itself.

Popular carry trade pairs include the EURJPY, USDBRL, NOKJPY, along with many Australian dollar, Russian Ruble, and Turkish Lira pairs.

Risk Aversion

The carry trade is usually profitable and fashionable among traders, but during periods of risk aversion when carry trade pairs get hammered, the currencies that lose most from the carry trade enjoy a brief period in the spotlight. These currencies include the US Dollar, the Japanese Yen, and the Swiss Franc. Since these currencies are sold most often by carry traders seeking interest income, at times of market turmoil they are bought up to cover debt and reduce margin, which results in rapid appreciation in their prices against all other currencies.

Reserve Currencies

Reserve Currencies include the Japanese Yen, the British Pound, the US dollar, the Swiss Franc, and the Euro. The value of these currencies arises out of their status as safe havens, and stores of value. Although the American government is not very disciplined in its spending habits, the currency is the dominant reserve currency of the world because of its great value as the world’s main medium in trade transactions. Reserve currencies such as the Euro or the British Pound are popular with carry traders, and as such, they don’t fare very well during periods of risk aversion, depending on the currency pair. Other reserve currencies are sold by carry traders, and consequently they perform very well in adverse market conditions.

Commodity Currencies

Commodity currencies, such as the Australian and Canadian dollars, the Brazilian Real, and the Russian Ruble tend to move in tandem with the fortunes of the commodity market. In many cases, one exported commodity dominates the others in importance, and its price also shows a strong correlation to the price of the commodity currency.

In general commodity currencies are popular with carry traders. They appreciate during times of boom, and are sold off when risk aversion rises.

Conclusion

Before getting to the stage of choosing your forex broker, it is a good idea to increase your level of knowledge in order to derive the maximum benefit from trading. Learning about currency pairs is a good place to begin. Successful combination of a currency with a fitting style can result in an exceptionally profitable trading style.

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Risk Warning (Disclaimer): Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. Investatech Inc., its employees or the authors of this website cannot be held responsible for any losses occured to you due to trading forex or taking advice from this website. Trade at your own discretion.