Anytime you’re dealing with foreign exchange trading, there are trillions of dollars turned over each day. It’s the largest market in the world when looking at OTC (over-the-counter) markets. It’s not completely liquid, but it definitely offers plenty of opportunities for individuals who like this type of trading. However, if you’re just getting involved, the currency trading basics are crucial.
How does the Forex Market Work?
Like stock traders who trade the shares of various companies, Forex traders trade the currencies of various countries. Unlike the thousands of stocks listed on every stock exchange in the world; Forex trading is quite simple because there are eight currencies which are commonly seen in currency trades across the world and constitute 85% of the volume of the forex market. These include:
* USD (United States currency) * JPY (Japanese yen) * EUR (Euro) * GBP (Great Britain pound) * CAD (Canadian dollar) * AUD (Australian dollar) * CHF (Swiss franc) * NZD (New Zealand dollar)
The first thing you notice about each one is they are traded in pairs. Some of these might include USD/JPY, USD/CAD, AUD/USD, or GBP/USD. The left currency is your base, and the right currency is the quote. These are considered counter/quote currency. Let’s say you’re the trader and you buy 1 unit of base currency. If you want to sell 1 unit, you’re looking at the quote currency. The point is; base currency is a commodity being sold, and this number revolves around the x units of quote currency.
Okay, so if you see USD/CAD then it means you will be purchase the USD by selling CAD (check above for abbreviation meanings). If you do this, you’re “going long,” but if you’re “going short”, you’re selling USD and buying CAD.
If you’re just learning about forex trading for the first time, we highly recommend concentrating on a single pair. Its low risk and it can help you get the experience you need to do well in the forex market.
Currency Trading Basics: the Price
Currency market pricing has two figures; the bid price and asking price. When you’re dealing with the bid price, it’s what your broker or anyone else is willing to pay for the currency. Now if you want to be the buyer then looking at the “ask” price will be your main concern.
There will always be a difference in these two figures which is known as the bid/ask spread; with the bid price always being lower than the ‘ask’. The bid price is how the forex broker makes his living because generally there is no commission charged on currency trades. This is; of course, another benefits of trading in the forex market.
Currency Trading Basics: What is a PIP?
A “pip” is the lowest increment increase in the currency price. It’s based per unit and stands for price interest point. If you’re looking at EUR/USD and it moves 1.2555 to 1.2560, it has increased 5 “pips.” So it’s easy to figure out that .0001= 1 pip
Currency Trading Basics: Making Money with Small Figures?
Obviously, when you look at the numbers above, trading 100 units of currency won’t provide you with tons of profits. However, a few thousand units will definitely do it. So how do you get your hands on this type of money? Well, this is all done through “margin.” A margin is the amount of money the broker is willing to invest for you. The standard ration is 1:100 or 1:500. So for every $1 invested, the brokerage puts up $100. So if you have $1000 you can get access to $100,000.
No, the broker’s money is never at risk, when trading on margin, your 1% is the money that you are playing with. For instance, if you were to invest $101,000 by putting in just $1000 and borrowing the rest from the brokerage house, the moment the value of your currency holding goes down to $100, 900 you will get a margin call from the broker, asking you to either add funds to your account or liquidate your position. If you want to hold your position, you will need to add some money into your account or; if you do not respond to the margin call, the broker will liquidate the position for you. So, as you can see, the broker’s money is never at risk.
Keep in mind; these currency trading basics are to help you get started. Yes, you can move a large sum of money through market and receive a huge gain, but it’s just as easy to lose money as well. If you’re smart, there won’t be an issue.
Learn more about currency trading basics. Stop by Tom Taylor’s site where you can find out all about currency trading basics and what it can do for you.