Investors and traders around
the world are looking to the Forex market as a new speculation
opportunity. But, how are transactions conducted in the Forex market?
Or, what are the basics of Forex Trading? Before adventuring in the
Forex market we need to make sure we understand the basics, otherwise
we will find ourselves lost where we less expected. This is what this
article is aimed to, to understand the basics of currency trading.
What
is traded in the Forex market?
The
instrument traded by Forex traders and investors are currency pairs. A
currency pair is the exchange rate of one currency over another. The
most traded currency pairs are:
EUR/USD:
Euro
GBP/USD:
Pound
USD/CAD: Canadian dollar
USD/JPY: Yen
USD/CHF: Swiss franc
AUD/USD:
Aussie
These currency pairs generate
up to 85% of the overall volume generated in the Forex market.
So, for instance, if a trader
goes long or buys the Euro, she or he is simultaneously buying the EUR
and selling the USD. If the same trader goes short or sells the Aussie,
she or he is simultaneously selling the AUD and buying the USD.
The
first currency of each currency pair is referred as the base currency,
while second currency is referred as the counter or quote currency.
Each
currency pair is expressed in units of the counter currency needed to
get one unit of the base currency.
If
the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US
dollars are needed to get one EUR.
Bid/Ask
Spread
All currency pairs are
commonly quoted with a bid and ask price. The bid (always lower than
the ask) is the price your broker is willing to buy at, thus the
trader should sell at this price. The ask is the price your broker is
willing to sell at, thus the trader should buy at this price.
EUR/USD
1.2545/48 or 1.2545/8
The
bid price is 1.2545
The
ask price is 1.2548
A Pip
A pip is the minimum
incremental move a currency pair can make. A pip stands for price
interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15
pips. And a move in the USD/JPY from 112.05 to 113.10 equals 105 pips.
