Currencies are traded in pairs, meaning that you are really trading one currency for another. A simple way to understand this is to consider what you do when you go on foreign vacations. If you are an American (for example), and you plan to travel to another country, say Canada, then you might take say $1, 000 USD to the bank to change it for Canadian dollars. Let’s say the exchange rate is 1.4000, then for your $1,000 USD they would give you $1,400 CAD (ignore bank spreads/commissions). Now let’s say you didn’t spend the money and upon coming home you decide to change it back to USD currency. Now let’s say the exchange rate is 1.3700 (a change of 300 pips that could happen in a week), so your $1,400 CAD would convert back to $1,021.89 US (again, ignore bank spreads/commissions). Therefore you just made $21.89, a 2.19% increase in funds (not bad). In the Forex market you could have simply traded the “Currency Pair” called USD/CAD, first selling USD for CAD, and then later buying back USD with the CAD you have. Basically, you are trading one currency for the other.
Usually currencies are traded against the US dollar (USD), so you may be trading the US dollar against the Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Japanese Yen (JPY), Australian Dollar (AUD), New Zealand Dollar (NZD), and of course Canadian Dollar (CAD). There are other currency pairs, but you normally won’t be dealing with those.
Below is a list of terms you should learn.
PIP: The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point. A common exception is for Japanese yen (JPY) pairs which are quoted to the second decimal point.
BASE CURRENCY: The first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency.
CROSS CURRENCY PAIR: A pair of currencies traded in forex that does not include the U.S. dollar. One foreign currency is traded for another without having to first exchange the currencies into American dollars.
CURRENCY PAIR: The quotation and pricing structure of the currencies traded in the forex market: the value of a currency is determined by its comparison to another currency. The first currency of a currency pair is called the “base currency”, and the second currency is called the “quote currency”. The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.
QUOTE CURRENCY: The second currency quoted in a currency pair in forex. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency. This is also known as the “secondary currency” or “counter currency”.
What Weekend Gaps Tell Us
With more drama in euro-zone, events over the weekend impact the markets dramatically at the open. Recent elections in France and Greece were an excellent example, and certainly not the last one.
These gaps have interesting characteristics to be aware of, not only if you trade the markets at the open.
Markets reopen in Sydney’s morning time. Volume is very thin but trading is very active. Reactions to the news can be strong and choppy.
If your analysis (fundamental, technical or both) doesn’t justify this gap, the early hours are a good chance to act. If the gap will close, there is a higher chance it will happen before Tokyo joins in.
Forex trading is, in a nutshell, when you buy one country’s currency (i.e. the American dollar) by selling another country’s currency (i.e. the British pound). Currently, the U.S. dollar, British pound, the Swiss franc, the Japanese yen, and the euro are the major currencies on the foreign exchange market. Forex trading has become so popular that it has surpassed the New York Stock Exchange as the top financial market worldwide.
If you’ve never traded Forex online before, you must know what you expect. Following are some helpful tips that will prepare you for a successful experience trading Forex online.
- Know what you’re doing. Before you begin trading Forex online, you must know what you’re doing. Go in blindly and you risk losing your money: It’s that simple. Learn about trading Forex online by researching the market and the systems successful traders use.
What does it mean: this means that when you see a quote on your screen and hit the trade button, the order will be executed as is. Sounds simple, doesn’t it? Well, it should be simple, but with some brokers, this isn’t always the case. With unregulated brokers, you can find yourself buying at a higher price than seen on the screen, or selling lower. This isn’t too common, but not unheard of.
The more common case is an error message saying that your trade could not be realized: “Please try again”. When you try again, the price may have moved against you, or you may get the same error message again and again.
This is relevant also with orders: they aren’t executed when the market reached your stop loss or take profit point. That’s bad, but there’s worse: catching your stop loss point when the market was far away from you.