Understanding Forex Trading Quotes
Being able to read and understand a Forex quote can be a little confusing at first, but for the most part just try an remember two things:
1. The currency listed first is the BASE currency.
2. The value of that BASE currency is always going to be 1.
The US Dollar is the centerpiece of Forex Trading and is typically considered the BASE value. So if your chart reads something like USD/CAD 101.09 this means that $1 US dollar is equal to 101.09 Canadian Dollars. Not too difficult to understand.
Pips
Now lets talk about pips. What is a pip? In Forex Trading, prices are quoted in pips. Pip stands for “percentage in point” and is the fourth decimal point, which is 1/1000th of 1%.
In EUR/USD, a 3 pip Forex spread is quoted and read as 1.2500/1.2503. However there is one exception to the rule, and that’s the Japanese Yen or JPY. In Forex Trading, the JPY quotation only has two decimal points instead of the four as with other major currencies. (JPY 1/100 versus other currencies 1/1000) So a USD/JPY 3 pip spread would read like this 112.02/112.05. This may look a little confusing but as you begin Forex Trading it becomes much easier to understand.
What does all this mean?
Think of your Forex currency pairs as if they were on a teeter totter. When one goes up, the other goes down. So if you are trading the USD/JPY and the price of the US Dollar goes up, then the Japanese Yen goes down. When the price of the Japanese Yen goes up, then the US Dollar goes down.
Currency Pairs
The most commonly traded pairs in Forex Trading are those that consist the US dollar. In the last post, we mentioned the 6 major Forex currency pairs. For the British Pound (GBP), the Euro (EUR) and the Australian Dollar (AUD), you will see the quote reading something like GBP/USD 1.8306 which means that one British Pound equals 1.8306 US Dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar. In other words, if a Forex quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
A currency pair that does not include the US Dollar is called a “Cross Currency” but the basis is the same. If the pairs read EUR/JPY 127.95, then this means that 1 Euro is equal to 127.95 Japanese Yen.
In Forex Trading you will often see a two sided quote, a “bid” and “ask”. The ‘bid’ is the price at which you can sell the base currency while at the same time sell the counter currency. The ‘ask’ is the price that you can but the base currency while at the same time sell the counter currency. Forex Trading, what a concept.
Leverage & Margin
The leverage that Forex Trading provides is a big attraction to most traders. Leverage trading means that you don’t have to put all the money up to open a position. The banks actually back you on every dollar you trade with. With Forex Trading the leverage can be up to 200 times the value of your account. Now that’s serious leverage. The Forex provides a lot more leverage then either stocks or futures.
There are several reasons for the higher leverage that is offered in the Forex Trading market. On a daily basis, the volatility of the major currencies is less than 1%. This is much lower than an active stock, which can easily have a 5-10% move in a single day. With leverage, you can capture higher returns on a smaller market movement. More importantly, leverage allows traders to increase their buying power and utilize less capital to trade.
Forex encyclopedia, forex terms
Ask (Offer) - price of the offer, the price you buy for.
Bank Rate - the percentage rate at which central bank of a country lends money to the country’s commercial banks.
Bid - price of the demand, the price you sell for.
Broker - the market participating body which serves as the middleman between retail traders and larger commercial institutions.
Cable - a Forex traders slang word GBP/USD currency pair.
CFD - a Contract for Difference - special trading instrument that allows financial speculation on stocks, commodities and other instruments without actually buying.
Commission - broker commissions for operation handling.
CPI - consumer price index the statistical measure of inflation based upon changes of prices of a specified set of goods.
EA (Expert Advisor) - an automated script which is used by the trading platform software to manage positions and orders automatically without (or with little) manual control.
ECN Broker - a type of Forex brokerage firm that provide its clients direct access to other Forex market participants. ECN brokers don’t discourage scalping, don’t trade against the client, don’t charge spread (low spread is defined by current market prices) but charge commissions for every order.
Fibonacci Retracements - the levels with a high probability of trend break or bounce, calculated as the 23.6%, 32.8%, 50% and 61.8% of the trend range.
Flat (Square) - neutral state when all your positions are closed.
Fundamental Analysis - the analysis based only on news, economic indicators and global events.
GTC (Good Till Cancelled) - order to buy or sell of a currency with a fixed price or worse. The order is alive (good) until execution or cancellation.
Hedging - maintaining a market position which secures the existing open positions in the opposite direction.
Jobber - a slang word for a trader which is aimed toward fast but small and short-term profit from an intra-day trading. Jobber rarely leaves open positions overnight.
Limit Order - order for a broker to buy the lot for fixed or lesser price or sell the lot for fixed or better price. Such price is called limit price.
Liquidity - the measure of markets which describes relationship between the trading volume and the price change.
Long - the position which is in a Buy direction. In Forex, the primary currency when bought is long and another is short.
Loss - the loss from closing long position at lower rate than opening or short position with higher rate than opening, or if the profit from a position closing was lower than broker commission on it.
Lot - definite amount of units or amount of money accepted for operations handling (usually it is a multiple of 100).
Margin - money, the investor needs to keep at broker account to execute trades. It supplies the possible losses which may occur in margin trading.
Margin Account - account which is used to hold investor’s deposited money for FOREX trading.
Margin Call - demand of a broker to deposit more margin money to the margin account when the amount in it falls below certain minimum.
Market Order - order to buy or sell a lot for a current market price.
Market Price - the current price for which the currency is traded for on the market.
Offer (Ask) - price of the offer, the price you buy for.
Open Position (Trade) - position on buying (long) or selling (short) for a currency pair.
Order - order for a broker to buy or sell the currency with a certain rate.
Pivot Point - the primary support/resistance point calculated basing on the previous trend’s High, Low and Close prices.
Pip (Point) - the last digit in the rate (e.g. for EUR/USD 1 point = 0.0001).
Profit (Gain) - positive amount of money gained for closing the position.
Principal Value - the initial amount of money of the invested.
Realized Profit/Loss - gain/loss for already closed positions.
Resistance - price level for which the intensive selling can lead to price increasing (up-trend)
Settled (Closed) Position - closed positions for which all needed transactions has been made.
Slippage - execution of order for a price different than expected (ordered), main reasons for slippage are - “fast” market, low liquidity and low broker’s ability to execute orders.
Spread - difference between ask and bid prices for a currency pair.
Stop-Limit Order - order to sell or buy a lot when the market reaches certain price. Usually is a combination of stop-order and limit-order.
Stop-Loss Order - order to sell or buy a lot for a certain price or worse. It is used to avoid extra losses when market moves in the opposite direction.
Support - price level for which intensive buying can lead to the price decreasing (down-trend).
Technical Analysis - the analysis based only on the technical market data (quotes) with the help of various technical indicators.
Trend - direction of market which has been established with influence of different factors.
Unrealized (Floating) Profit/Loss - a profit/loss for your non-closed positions.
Useable Margin - amount of money in the account that can be used for trading.
Used Margin - amount of money in the account already used to hold open positions open.
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