Forex Trading Basics Part 1
This tutorial is directed to guiding the traders through the very important part of Forex trading. Currency trading basics is the MAIN THING that every and each trader needs to know even before he starts trading. Currency trading Basics is the key to successful trading and the core of knowledge that educated trader needs to hold.
Exchange Rate
All of the trade currencies have been assigned by an ISO (International Standards Organization) code abbreviation. When trading currencies, codes are usually used for expressing which particular currencies match the pair of the trader. Example: EUR/USD shows two currencies, Euro and Dollar.
Exchange rate refers to no more that the ratio of a currency that’s been traded to another. The first one of them is called the base one, the second is the quote (or counter) currency. When buying, the exchange rate can show how much trader has to pay in the quote currency to get one unit of the base currency. When selling, the exchange rate is the one that specifies how much can trader get in the quote currency for selling one unit of the base currency. In EUR/USD Euro dollar is base and American Dollar is quote.
Bid/Ask Price
Exchange rate is usually given as a bid and ask price, where the bid price is always lower than the ask price. The bid price is for representing what will be obtained in the quote currency if selling one unit of the base currency. The ask price in the meantime is representing what the trader has to pay in the quote currency to get one unit of the base currency. The price following is for example of the bid/ask notation EUR/USD: 1.3850 / 1.3851
In this example, the component that stands before the slash is representing the bid price (what trader gets in Dollars when he sells Euro), and the bid price is 1.3850. After the slash there is the second component that’s used to show the ask price (how much trader has to pay in Euro if he’s buying Dollars). The ask price is 1.3851.
Spread
Spread is what the difference between the bid and ask price is called. When looking to the example that’s above, the spread is about 0.0001 – 1 pip. Some currency pair quotes are carried out to the 2nd decimal place, unlike the pair that’s in example higher. USD/JPY for example may be quoted at 119.45/50, so, 5 pips are representing the difference in 0.05 in this case. The pip may really seem small, but nevertheless, the movement of only one pip in one direction or another can be translated into thousands of dollars of gains or losses to the inter-bank market.
If the traded amounts are about $1M and higher, the spread obtained in a quote is normally counted as 5 pips. In the case of trading smaller amounts, the spread is automatically larger. If the trader’s going into trade less than $100.000 spreads of 50-200 pips are common. Credit card companies usually use a spread of 200-300 pips. Banks, institutions and bureaus of exchange use the 200-1000 pips range of the spread (additionally charging the commission of course).
Buying and selling is the important part of Forex trading basics. All trades are containing from buying one of the currencies and selling the other currency.
Buying
(or going long) the currency pair means buying the first (or the base one) currency and selling the equal amount of the quote currency in order to pay for the first one. It’s not really necessary to own the quote currency prior to go selling, because it is sold short. Trader is buying a currency pair in case of believing that the base one of the currencies is about to go up relative to the second one, quote currency, or equally that the corresponding exchange rate is about to go up.
Selling
(or going short) the currency pair means that the trader sells the base currency and buys the quote currency. Selling currency pair is happening when the trader believes that the base currency will go down according to the quote currency, or vice versa.
Another term of Forex basics is the open trade or position, that’s referring to the trade where a trader has bought or sold one currency pair and at the meantime hasn’t sold or bought the needful amount of the currency pair to close the trade maximum effectively. Holding the open trade or position, trader usually waits for profit due to the changes in the price of the currency pair.
Another thing much needed to know in Forex basics is Forex Market Hours. From the first view, it may seem that the multiple Forex markets all over the world and different Forex Trading Times are hard to remember and distracting, but it’s not true. The existing of different markets and the difference of Forex Market Hours leads to success, but only for those who knows how to use it to his own success.
There are 4 main markets, New York, London, Sydney and Tokyo. They work in different Forex Trading Times each, and open the whole variety of trading possibilities to the Forex trader. Forex Trading Times for each market are:
New York – 8 am – 5 pm;
Tokyo – 7 pm – 4 am;
Sydney – 5 pm – 2 am;
London – 3 am – 12 am, all time in EST.
Trading in any possible region is always reaches its highest part during the first business hours, when all the traders at large financial institutions are busy with filling and placing the orders. The most active times are the times when the liquidity is the highest and so is the movement in the markets. These are the London market opening (3 AM EST) and the overlap when the London is closing and New York is opening (8-11 AM EST).
