This article is an introduction to foreign exchange trading.
The foreign exchange trading market is one of the most exciting markets to partake in. It is the largest financial market and is extremely fast-paced. It appears to be simpler to understand than the stock market, however you have to take the time to learn everything you can about it before you starting trading in a live account.
The currency movements are extremely small on a daily basis. Most currency pairs do not move more than one cent per day. This represents a one percent change in value. This makes it almost impossible to trade without making use of leverage to increase your returns because the movements are so small.
In the forex market, leverage ratios can be as high as 400:1 if you are trading to a value below $50000 or it can drop to as low as 20:1. The availability of these levels of leverage and the size of this financial market is what has made it so popular. Besides that, it is extremely easy to place trades. You can open and close your trades within seconds at the exact price as it appears on your screen. All this can be done without the need to pay commissions.
The trading times in this market is also an attractive feature. There are no traditional business hours. The market is open for trading Monday to Friday, all day and night.
Each transaction involves two currencies and two separate trades. The one is the purchase of a currency and the other is the sale of another currency. This is the reason why forex quotes always combines two currencies, known as a currency pair. There are many different currencies you can trade, but the ones most heavily trades are the US dollar, Euro, British pound, Japanese yen, Swiss franc, Australian dollar, New Zealand dollar and the Canadian dollar.
In view of the range of currencies available to trade, there are many different currency pairs available. This can cause confusion if you intend trading too many currency pairs. If you are a beginner in the market, it is advised that you get to know and understand one major currency pair, practice with that particular pair and then move on to an alternate pair.
Reading a Foreign Exchange Trading Quote
All currencies are quoted in pairs, such as USD/AUD or USD/JPY. The reason for the quotes being in pairs is because when you buy a currency, you are selling a different currency too.
A standard quote would be USD/AUD=1.0600. This means that the currency on the left of the slash, the US dollar, is the base currency. The currency on the right of the slash, the Australian dollar, is the quote currency or counter currency. The base currency is always the equivalent of a single unit. The quote currency is what one base currency unit is worth in the other currency.
In this example it indicates that to purchase one US dollar, you will need to have 1.06 Australian dollars. If you had one US dollar for sale, you would receive 1.06 Australian dollars.
In an instance where you are purchasing the base currency and disposing of the quote currency, you would be entering into a long trade. If you wish to dispose of the base currency and purchase the quote currency, you are entering a short position.