Currency Trading Basics- Understand the Forex Market
When it comes to foreign exchange trading, it has daily turnover that reaches trillions of dollars. It's considered the largest OTC (over-the-counter) market in the world. Even though the market isn't completely liquid, it offers plenty opportunities to those who are interested in this type of trade. In order to get start you will need to know the basics, which is what we're going to cover today.
Currency trading basics: How does the forex market work?
Just like stock traders trade shares, those involved with Forex trading simply trade currency of different countries. The difference is the Forex trading doesn't require knowledge around the thousands of stocks that are listed. It's as easy as looking over 8 different currencies that are common across the world. In fact, these 8 options make up 85% of the overall volume in the market. The list includes:
* 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.
So when you see USD/CAD, you're purchasing the US dollar by selling a certain amount of Canadian dollars. This is considered "going long." If you "go short," you're purchasing Canadian and selling USD.
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.
Probably the most important thing to understand here is the brokerage never puts their money at risk. You are simply playing with 1% of your money, so if you invest $101,000 by using the grand you put up, the rest is being borrowed from the brokerage. If your currency holding reaches losses of $100 then you get a "margin" call from the broker. When this takes place, he/she will ask you to add funds to your account or relieve your position. It's the only way you can hold your position, and if they do not hear from you, the position is lost.
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.
Article Source: FxTradingStock.com
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Looking to find the best deal on currency trading software, then visit http://currencytradingbasics.orgto find the best advice on animated software download for you.
by: Tom Taylor
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Date: Sun, 23 Jan 2011
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