Foreign Exchange
Market Basics
Date Added: June 8th,
2005
By Danny "GEKKO" Miliaresis
The Foreign
Exchange (FOREX) Markets has grown to be the largest single market
in the world, trading $2 trillion per day. The FOREX market
also has its own uniqueness about it.
In the
Foreign Exchange Market, there are 6 major currency pairs that are
traded the most, accounting for 90% of the daily trading activity.
They include:
1. EUR/USD =
Euro vs. U.S. Dollar
2. JPY/USD = Japanese Yen vs U.S. Dollar
3. USD/CHF = U.S. Dollar vs Swiss Franc
4. AUD/USD = Australian Dollar vs U.S. Dollar
5. GBP/USD = British Pound vs U.S. Dollar
6. USD/CAD = U.S. Dollar vs Canadian Dollar
When reading the Forex quotes you have to look at the
bid price (highest price willing to buy) vs the ask price (lowest
price willing to sell). The currency that is located in the
front of the pair (EUR/USD)
is called the base currency and has the value of 1. If you
see that the bid of the Euro vs U.S. Dollar is trading at 1.2811,
that means that if you were to buy one Euro you are going pay $1.2811.
When the
bid and ask prices are moving in an uptrend, it means that the secondary
currency (EUR/USD)
is getting weaker while the base currency (EUR/USD)
is in turn getting stronger. Every pip it goes up the stronger
the base currency is getting. The pip
(price interest point) is
almost identical to a tick in a stock price. The pip is the smallest
increment; a move from $1.2811
to $1.2821
is a 10 pip move upwards.
When trading the pairs, you should think of the base
currency as what we are 'buying' and 'selling.' If we were
to buy (long) the EUR/USD, means that we bought (long) the euro,
hoping it goes up, and selling (short) the dollar, hoping it will
fall.
If we were to sell (short) the EUR/USD, means that
we sold (short) the euro, hoping it fall and in turn buying (long)
the dollar hoping it will rise.
When trading in the Foreign Exchange markets you trade
in 'lots' compared to 'shares' when trading stocks. Lots are
in increments of 10,000s:
1 lot=10,000 units
2 lot=20,000 units
3 lot=30,000 units
This means that the minimum you can purchase is 10,000
units of a certain currency pair (with some accounts lots can reach
increments of 100,000). For example, if we were to buy 2 lots
of the EUR/USD with the bid price at 1.2811, we would spend $25,622
(20,000 x 1.2811= 25,622) of our buying power. With buying
2 lots this means for every pip that it goes up (in your favor,
if you sold short you want the base to fall) you make $2.
Considering the movements of some of these pairs, it's possible
to generate considerable profits. You can not forget the buying
power offered by the currency brokerage firms, as high as 200:1.
Turning a $1,000 into a buying power of $200,000, making it able
to buy 10-15 lots at a time(the more lots bought or sold the more
risk involved).
It's important to remember
that high risks accompany any investment that offers the potential
for great returns. Always way the advantages and disadvantages
of any investment before putting your capital at risk. We
advise anyone to become extremely familiar with the foreign exchange
markets before trading in them..
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