How Currencies are quoted and what moves individual currencies?
ONE of the best advantages in FOREX Trading is
The amount of money you need to place a trade (known as
"margin") is all that can be lost !
You have to know, that despite the super-high leverage offered
by some Forex brokers up to (400:1); meaning if you put up $
1000 the broker will allow you to trade like you really have
$400.000).
Forex trading is still less riskier than Stock or Futures
Trading, where you can loose more than you have deposited in
your account.
This type of LEVERAGE does NOT EXIST in the equities or futures
market
In the Equities or Futures markets, very often, sudden and
dramatic moves occur, against which you can't protect yourself,
even by having placed your protective stops.
Your position may be liquidated at a loss, and you'll be liable
for any resulting deficit in the account.
But because of the FX market's deep liquidity and 24-hour,
continuous trading, dangerous trading gaps and limit moves are
almost eliminated.
Orders are executed quickly, without slippage or partial fills.
And finally, there are no margin calls. For your protection, the
broker will automatically close out some or all of your open
positions if your account equity falls below the level required
to hold the positions.
Think of this as a final, automatic stop, always working on your
behalf to prevent a debit balance.
Currencies are traded in dollar amounts called " LOTS"
In Forex trading, with most Brokers, you have the choice between
2 different lot sizes.
Standard Lots or Mini Lots.
One Standard lot is equal to $100,000 in currency. The margin
requirements, using a 400:1 Leverage, would be US$ 250, in other
word you control $100,000 worth of currency for only 250 US
dollars.
You mean, depositing $250 with a broker, I could trade 100,000$
worth of currency ???
NO, be aware, that your account size has to be more than the
required margin of US 250. For example, if you place an order to
buy 1 Standard lot ( @100,000) of USD/JPY and USD/JPY is quoted
as 112.10/112.13, you buy USD/JPY at 112.13.
Your account balance would be $220, because you paid 3 pips or $
30 for this trade.
If you would close this trade immediately, you have to sell it
at 112.10 (the bid price) , for a loss of $ 30.
In fact you could not get executed on this trade, as the brokers
trading platform would reject your order, for the reason of
having insufficient funds in your account).
So, your account balance has to be minimum $280. $250 for margin
and $30 for the trade.
BUT....IF, after you have initiated the trade to buy USD/JPY at
112.13, and the USD/JPY falls the next second 1 pip ( approx.
$8), your position would be closed
automatically, because of
margin deficit.
I will explain later about having an adequate account size to
trade the Forex Market.
Currencies are always traded in pairs in the FOREX. The pairs
have a unique notation that expresses what currencies are being
traded.
The symbol for a currency pair will always be in the form
ABC/DEF. ABC/DEF is not a real currency pair, it is an example
of a symbol for a currency pair. In this example ABC is the
symbol for one countries currency and DEF is the symbol for
another countries currency.
Some of the most common symbols used in Forex are:
USD - The US Dollar EUR - The currency of the European Union
"EURO" GBP - The British Pound or cable JPY - The Japanese Yen
CHF - The Swiss Franc AUD - The Australian Dollar CAD - The
Canadian Dollar
There are symbols for other currencies as well, but these are
the most commonly traded ones.
A currency can never be traded by itself. So you can not ever
trade the USD by itself. You always need to BUY one currency and
SELL another currency to make a trade possible.
Some of the most traded currency pairs are:
EUR/USD Euro against US Dollar
USD/JPY US Dollar against Japanese Yen
GBP/USD British Pound against US Dollar USD/CAD US Dollar
against Canadian Dollar
AUD/USD Australian Dollar against US Dollar
USD/CHF US Dollar against Swiss Franc
EUR/JPY Euro against Japanese Yen
The currency left of the / is called the base currency.
The currency right of the / is called the counter currency.
When you place an order to buy the EUR/USD, for instance, you
are actually buying the EUR and selling the USD.
If you were to sell the pair, you would be selling the EUR and
buying the USD. So if you buy or sell a currency PAIR, you are
buying/selling the base currency.
The best way to remember is, by just thinking of the entire
currency pair as one item.
If you buy it...you buy the first currency and sell the second
currency. If you sell it...you sell the first currency and buy
the second currency.
That means you would to be able to short-sell with no
restrictions so you could make money when the market drops as
well as when it rises.
The problem with traditional stock market or commodity trading
is that the market has to go up for you to make money. With
FOREX trading you can make money in all directions.
About the author:
Veteran Trader Martin Maier is the Founder of
Fenix Capital Management LLC He is the developer of various
futures and commodities trading programs and his systems have
been ranked and rated by various large American Investment
Profile Rating Companies such as STAR and MAR.
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest / trade in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading.
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