Simply put, Forex Trading is about the buying and selling of 2 currencies simultaneously. In the world of currency exchange- Forex (Foreign Exchange), there are jargons used that are not found elsewhere in the world of investment. Understanding those terms will go a long way toward helping anyone take the 'foreign' element out of foreign exchange.
How is Currency Trading Done?
Currency trading is always done in pairs. In other forms of trading such as stocks and bonds, cash is exchanged for something which could a percentage of ownership in the company or a promise to pay interest over regular intervals. For Forex, cash is traded for cash.
For example, Euros can be traded for dollars, dollars for yen, yen for euros and so on. To illustrate this, assume that EUR/USD is quoted at 1.2537/40. This means that for US$1.2540 you can buy one euro. To sell euros you own in exchange for dollars, you would receive US$1.2537 for one euro.
There are dozens of trading pairs, just as there are dozens of currencies around the world that participate in the currency exchange markets.
Major Currencies in Currency Trading
The major players are:
- US Dollar (USD),
- Euro (EUR),
- Australian Dollar (AUD),
- British Pound (GBP),
- Canadian Dollar (CAD),
- Japanese Yen (JPY)and
- Swiss Franc (CHF).
Most of all daily transactions involve trading of these major currencies. When reading quotes, investors will see prices listed as:
Name ------- Bid --------- Ask --------- Change ------- %Change ------ High / Low ---------- Time
EUR/USD -----1.1901----- 1.1903 --------- -0.0091---------- -0.76% ---------- 1.2024/1.1891 ---------- 15:26
GBP/USD -----1.7439----- 1.7442 --------- -0.0004---------- -0.02% ---------- 1.7573/1.7410 ---------- 07:01
The currency listed on the left is called the 'base currency' (EUR & GBP) and the second is the 'quote currency' (USD).
The 'bid' is the price at which brokers are willing to buy the base currency. The 'ask' price is that at which brokers are willing to sell the base currency. The quotes are always listed from the brokers' point of view. So if you (the trader) wants to buy the base currency the ask price will apply. If you (the trader) wants to sell the base currency the bid price will apply.
EUR/USD 1.1901/03 means:
If you buy 1 EUR you will pay 1.1903 USD
If you sell 1 EUR you will receive 1.1901 USD
GBP/USD 1.7439/42 means:
If you buy 1 GBP you will pay 1.7442 USD
If you sell 1 GBP you will receive 1.7439 USD
The difference between bid price and ask price at a single specific time is called the "Forex Spreads". The spread is measured in pips (price interest points). The 'pip' is often said to be the smallest increment by which the price changes.
If the bid price of the EUR/USD pair changes from, say, 1.1901 to 1.1902 that's a single pip. That's a (bid or ask) price at two different times.
Remember not to confuse this difference with the spread, which is a difference between the bid and ask price at a single, specific time. To learn more about
Currency Exchange
, I would recommend this book by Jermaine
Quick Forex Tip #1
Forex trading is the largest known financial market. Day or night, it doesn’t really matter; the trade goes on even as half of the world is asleep. It offers a lot of opportunities for many organizations and individuals to make profit. There are many day traders in the market, and if you think you can do it, why not join the day traders. |
Quick Forex Tip #2
Don’t let your emotions rule you, especially when you're making trading decisions. A successful Forex trader should always be disciplined, and once you attain your objective, leave the market. Many times, people plunge in deeper because they are influenced by greed and fear. Don't be like them. |
Quick Forex Tip #3
Getting a good education about Forex trading will also let you increase your chances of profiting and decrease the risks involved. In getting the proper education in Forex trading, you will also learn how to read Forex charts. Forex charts are one of the most important things you should learn in order to successfully trade in the Forex market. Without this knowledge, you are doomed to fail in this very liquid market. |
