Forex Trading and What You Should Know Pt1

1- Currency Pairs

I think we should post here first of all as with any trading related information a - Disclaimer

Trading on the Forex market involves substantial risks, including complete possible loss of funds and other losses and is not suitable for all members.

Client should make an independent judgments as to whether trading is appropriate for him/her in light of his/her financial condition, investment experience, risk tolerance and other factors.

Furthermore I must also say that this hubpage is never intended to give any sort of Professional advise or counsel, and if you need further clarifications please feel free to seek out the advise of a legal or financial professional.

The general perception is that any and every person who is involved in the business of trading of currency or foreign exchange is a person who has a super high IQ.

To hear words and phrases like liquidity ratio, central bank intervention and inflationary demand makes us feel as if we are back in the boring and inherently avoidable lecture on economics that we were forced to attend in our college.

However, all these preconceived notions apart, forex or currency trading is not the domain for the super intelligent alone. There is no doubt that you need brains to get involved in forex trading. Then, I bet you cannot name a single sphere of human activity that does not need the application of one's mind. A bit of brains and lot of research can help you make a tidy sum in currency trading.

If you have not heard of currency trading or the FOREX market before, then you might be surprised to learn what you may have been missing.

The FOREX is the largest financial market in the world with over $3 Trillion traded each day. That is at least 10 times the amount of all the stock markets combined.

While a handful of big banks accounted for over 70% of the trading, the number of smaller retail traders joining the FOREX action has increased over the years.

There are many advantages and benefits of currency trading compared to the stock market. Because of its size and trading volume, the FOREX provides infinite liquidity and flexibility to the traders.

We could consider a currency to be simply a tool used as a means to exchange value. However, when developing a trading system, we are not interested in the transfer of goods or services having value, but in the value represented by one currency in relation to another.

So that, within the context of the Foreign Exchange market, we can define a “currency pair” as a means to describe the value of a currency by its comparison to another currency.

A currency pair depicts a quotation of two different currencies. The first currency in the pair is the base currency (or transaction currency).

The second currency in the pair is labelled quote currency (payment currency, counter currency). Such a quotation depicts how many units of the counter currency are needed to buy one unit of the base currency.

For example the quotation EUR/USD 1.2500 means that one euro is exchanged for 1.25 US dollar. If the quote moves from EUR/USD 1.2500 to EUR/USD 1.2510, the euro is getting stronger and the dollar weaker.

On the other hand if the EUR/USD quote moves from 1.2500 to 1.2490 the euro is getting weaker while the dollar is getting stronger.

Majors are the most liquid and widely traded currency pairs in the world. Trades involving majors make up about 90% of total Forex trading.

The Major pairs are: EUR/USD (Euro vs US Dollar), GBP/USD (Great British Pound vs US Dollar), USD/JPY (US Dollar vs Japanese Yen), USD/CHF (US Dollar vs Swiss Franc), AUD/USD (Australian Dollar vs US Dollar) and USD/CAD (US Dollar vs Canadian Dollar).

GBP/USD is the only currency pair with its own name. It is known as "Cable", which has its origins from the days when a cable under the Atlantic synchronized the GBP/USD rate between the London and New York markets.

The usually quoted rate is a "spot price". For a real transaction there are two prices: the lower price (bid) is the price at which a market maker or a brokerage in general is willing to buy the first currency of a pair; the higher price (ask) is the price at which a brokerage is willing to sell the first currency of a pair. See bid/ask spread for more.

A Pip - a percentage in point (pip or point) is generally the fourth or fifth decimal place in forex trading; it can be thought of as a 'cent of a cent'. For instance, if the currency pair EUR/USD is currently trading at 1.3000 and then the exchange rate changes to 1.3010, the pair did a 10 pips move.

As an exception, in Yen pairs (GBP/JPY, EUR/JPY, USD/JPY) a pip is the second decimal place, since a Japanese yen is much closer in size to a cent/hundredth of other major currencies. You normally have a standard lot = $10 per point, Mini lot = $1.00 per point, Micro lot = 0.10 cents per point.

In order to calculate the pip value or how much is one pip, some additional information is needed, such as: trading size, leverage used, and the actual rate of the pair for which you want to calculate the pip value.

For example in case of US Dollar, with trading volume of 1 lot (generally 100,000 units of the base currency), the minimum fluctuation point will be 10 USD. For example if the quotation of EUR/USD is 1.3607/1.3609, then the spread is USD 0.0002 (or 2 pips). And using a standard lot example the value of the 2 pips would be 10.00 X 2 = $20.00.

Whenever we purchase a product, we pay money for it. This is also what happens in the stock and futures trading markets: we trade our money in exchange for a stock or for a futures contract. It's not a difficult concept to grasp.

Now, in the currency or Forex market, things will get a little more complicated. You see this time, instead of trading money for goods you are trading money for money.

So for example, if I wish to purchase 1 Euro, I would have to pay a certain amount of U.S. Dollars for it. If I wish to purchase 1 Pound, I also would have to pay a certain amount of U.S. Dollars for it.

Now that you have a clear understanding of the Forex currency pairs we will move onto some insite into the Brokers in the global trading market in the next edition.


(c) Manny Mullins