Forex Trading Basics Part 2

This tutorial is continuing of the previous part of Forex trading basics tutorial. Here is some more information about currency trading basics.

The basic entry and exit rules of Forex market are that buying a currency is equal to taking a long position in it, and selling a currency is equal to selling short that currency.

Direct, Indirect and Cross Rates

What’s important about Forex basics are Direct, Indirect and Cross Rates. Direct Rates are the market rates that have been directly traded against the US Dollar. US Dollar is mostly the base currency in the pair, where the quote currency expresses a number of units paid per 1 Dollar. Indirect Rates, in turn, are the rates that express the currency pairs where dollar is NOT the base currency, instead it’s the quote currency counter. Like GBP/USD – that’s the example of indirect rate. Finally the Cross Rates are those stated to the currency pairs where Dollar is none of two currencies that have been traded. Trading two currencies with no Dollar usually mean trading one against the Dollar and then the Dollar against second one. Only few non-Dollar currencies are traded directly, like EUR/CHF or GBP/EUR.

Leverage

What more currency trader has to know about currency trading basics is about the Leverage. Leverage that’s been financed with the credit that can be purchased on the margin account is the common happening on the Forex market. What is margined account? The leverageable one, with the help of which Forex can be purchased with a combination of collateral or cash that can depend on what trader’s broker can accept. The leverage can eventually work against the trader and compound losses. Trader’s deposit collateralizes the leverage in the margin account; the broker can ask the trader to put more cash, sell the part of the position or even close it in case when the value of position is sufficiently breaking. It’s important to check out with the company the trader is working with in order to ensure that there will be no misunderstandings about margin rules, as they may not be regulated in some countries.

Even the small investors are able to trade the large amounts of positions. The amount of leverage the trader uses is depending on his broker and what the trader is comfortable with. These days with the help of some brokers the trader can get leverage from a high as 1%. This means that $100.000 can be controlled with the help of only a thousand dollars. The broker may have a minimum account size typically. This is also known as account margin. Once the trader invests (deposits) his money he is able to trade. In example given above the trader gets the opportunity to take a lot of $100.000 for every thousand dollars he has, so if he deposits the $2.500 the brokers may allow him to trade up to $250.00 of Forex. The broker may also take the minimum security from every operation. In the example above the minimum security is 1%. During the weekends, the margin required by brokers can be higher.

In conclusion, the word about the Forex basics can be said. This is the core the trader must refer to all the time. The knowledge is power. Forex basics is the knowledge.