Foreign Exchange Trading Basics

Foreign exchange trading describes trading in various currencies of the world.It is the largest and least regulated market providing the greatest liquidity to investors.The spot foreign exchange market is the most liquid.Spot meaning that trades are settled within two banking days.There is no central exchange of physical location.Trading takes place over-the-counter,24hrs a day,directly between two parties of a trade over the telephone or electronically.Participants in foreign exchange include banks,corporate organizations,individual investors,speculators,and hedge funds.With the advent of electronic trading platforms,self directed investors and smaller financial firms now have access to the same liquidity as larger markets participants.Trading or speculation makes up 95% of daily volume.The other 5% of daily volume consists of government and commercial companies converting one currency into another from buying and selling of goods and services.

When trading currencies,the trade is always done in pairs-CURRENCY PAIR.One currency is bought and the other sold.For example,if you buy Euros with Dollars,anticipating the Euro to increase in value relative to the Dollar.If the Euro rises relative to the Dollar,you sell the position and have made a profit.Most commonly traded currency(the majors) include;US Dollar,Japanese Yen,Euro,British Pound,Canadian Dollar,Australian Dollar,Swiss Franc.Commonly traded currency pair,and

When quoting currency pairs,the first currency is referred to as the base currency and the second the counter or quote currency.The base currency is always to 1 monetary unit of exchange.For example,1 Dollar,1 Pound,1 Euro.The dominant base currencies are in order of frequency.When a currency is quoted against the US Dollar it is called a direct rate. Any currency not quoted against the US Dollar it is called a direct rate.Any currency not against the US Dollar is referred to as a cross rate.The quote currency is translated into a certain number of units of the base currency.For example,a quote of US dollar/Japanese Yen at 1.20 says that for every 1 Dollar you get 1.20 Japanese Yen,while a quote for Australian Dollar/Japanese Yen of 67.73 says that for every 1 Australian Dollar,you get 67.73 Yen.Currency pairs are generally traded as 100,000 units of the base currency.For example,if you were buying Euro/US Dollar at 0.97,you would be paying Dollars for Euros as follows:100,000 x 0.97=$97,000 for 100,000 Euros.Dominant base currencies are Euro,British Pound,US Dollar.

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Currency Trading Strategies-Tips on How A Currency Trade Works

Foreign exchange trading is a speculative endeavour that requires proper training and education and should include strong discipline,risk management and money management skills.Just like in any market,the forces of supply and demand are in play.The emotional elements of greed and fear cannot be escaped.Have a plan that focuses on proper money and risk management techniques.Use stops to protect your money and minimize losses .Make money in both directions up and down.Unlike the equity market,there is no "upstick rule" that limits a trader's ability to sell short.Short positions can easily be entered by hitting the bid and are part of most speculative trading strategies.There is equal opportunity to profit in up and down markets.

Reading a currency quote:Reading a quote is very easy to do.It's really quite simple if you remember two things;1.The first currency listed is the base currency 2.The value of the base currency is always 1.The US dollar is the centerpiece of the foreign exchange market and it is normally considered the 'base' currency for quotes.In the margin,this includes US dollar/ Japanese Yen,US dollar/Swiss Francs and US dollar/Canadian Dollar.For these currencies and many others,are expressed as a unit of $1US dollar per the second currency quoted in the pair For example a quote of US dollar/Japanese Yen 110.01 means 1 US dollar is equal to 110.01 Japanese Yen.When the US Dollar is the base and a currency goes up, it means the US dollar has appreciated in value and the other currency has weakened.If the US dollar/Japanese Yen quote I previously stated increases into 113.01,the dollar is now stronger because it will now buy more Yen than before.The three exceptions to this rule are the British Pounds,the Australian dollar,and Euro.In these cases,you might see a quote such as British Pounds/US dollar 1.7366,meaning that one British Pound equals 1.7366US dollars.In these three currency pairs,where the US dollar is not the base rate,a rising quote means a weakening dollar,as it now takes more US dollars to equal one British Pounds,Euro,or Australian dollar.In other words,if a currency quote goes higher,that increases the value of the base currency.A lower quote means the dollar is weakening.Currency pairs that do not involve the US dollar are called cross currencies,but the premise is the same.For example,a quote of Euro/Japanese Yen 127.95 signifies that one Euro is equal to 127.95 Japanese Yen.When trading foreign exchange,you will often see a two-sided quote consisting of a bid and ask.The bid is the price at which you can sell the base currency.The ask is the price at which you can buy the base currency.

Meaning of a pip:In the foreign exchange market,prices are quoted in pips. Pips stands for percentage in point and it is the fourth decimal point which is 1/100th of 1%.In Euro/US dollar,a three pip spread is quoted as 1.2500/1.2503.Among the major currencies,the only exception to that rule is the Japanese Yen.In US dollar/Japanese Yen,the quotation is only taken out to two decimal points(i.e. to 1/100th of the Yen as opposed to 1/1000th with other major currencies).In a 3 pip spread is quoted as 114.05/114.08.

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