Forex Trading Basics
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.
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