Theory Of Economic Cycle

Forex Trading - How does it work?

Currency Pairs - What is Currency Pairs?

Buying and Selling Currency Pairs - How to Trade Forex

PIPS - What is Pips?

USD INDEX - What is US Dollar Index?

Basic Order Types

Basic Trade Types

Forex Trading Terminology

Forex Trading - How does it work?

In Simple words, Forex Trading is buying and selling of international currencies. The US dollar is almost always the base currency against which other currencies are bought and sold in real Forex Trading. Local currency can also be used as a base currency. In such a case it will be called a CROSS TRADE. Cross trading is then an exchange of two currencies where US dollar is not involved.

How Currency Trading Works

Say, if you decide through you analysis that the CAD might appreciate in value against US dollar in near future. The current exchange rate of CAD is 1.30 to a US dollar. You go to the bank and exchange US$ 10,000 for CAD 13,000.

US$ 1.00 = CAD 1.3000

US$ 10,000.00 = (1.3000 *10,000)

You will get: CAD 13,000

Profit

Later on, as expected, the CAD appreciates by five cents to CAD 1.2500 to a US dollar. You then take your CAD back to the bank and exchange them into US dollars. You will get US$ 10,434.78. This extra US$ 434.78 will then be your profit on top of your initial investment of US$ 10,000.

CAD 1.2500 = US$ 1.00

CAD 13,000 = (1/125)*13,000 = US$ 10,400

Initial Investment was: = US$ 10,000.00

Your PROFIT: = US$ 400.00

Loss
On the other hand, instead of appreciating, the CAD further weakens. After all, it was only an expectation that the CAD will appreciate and was not a guarantee.

Say, it weakens by five Cents to CAD 1.3500 to a US dollar. Now there are two choices, to either hold on to your CAD until it appreciates or exchange them back into US dollars. Suppose, you want to exchange them back into U.S.dollars for fears of further CAD weakness. You then exchange CAD to US dollars. You will get US$ 9,600.00. Your loss is US$ 400.00. Now your initial investment of US$ 10,000 is reduced to US$ 9,600.

CAD 1.3500 = US$ 1.00

CAD 13000 = (1/125)*13,000 = US$ 9,629.62

Initial Investment was: = US$ 10,000.00

Your LOSS: = (-US$ 370.37)

Forex Trading is neither gambling nor should it be perceived as such. In gambling, once you place a bet you cannot withdraw from a losing situation. You either win or lose. On the other hand, with Forex trading, you decide how much you are prepared to lose or wait until you are in profit depending upon your risk to reward ratio. Forex trading strategies provide several means to accomplish just that. Therefore, one can trade Forex euphorically which could amount to speculation or in an organized manner, whereby tools and techniques are there to help you learn how to trade currency, it's up to you to use them for your best interest.

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CURRENCY PAIRS

All currencies are assigned an International Standards Organization (ISO) code abbreviation. In currency trading, these codes are often used to express which specific currencies make up a currency pair. For example, USD/CHF refers to two currencies: the US Dollar and the Swiss Franc.

EXCHANGE RATE

An exchange rate is the ratio of one currency valued against another. The first currency is referred to as the base currency and the second as the counter or quote currency. If buying, an exchange rate specifies how much you have to pay in the counter or quote currency to obtain one unit of the base currency. If selling, the exchange rate specifies how much you get in the counter or quote currency when selling one unit of the base currency.

USD/CHF

Base currency/quote currency

SPOT FOREX

Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EUR/USD. That is, sell Euros and buy US dollars.

The following is guide for quoting conventions :

Currency Pairs - Exchange rate relationship between two currencies, where one currency is expressed in terms of the other. For example, USD/CAD (US dollar against Canadian Dollar) is a currency pair.

Base Currency - The base currency is first currency in any conventionally quoted currency pair. Thus in EUR-USD, Euro is the underlying currency ; in USD/JPY it is the US Dollar ; while in EUR/JPY, it is again Euro.

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Buying and Selling Currency Pairs - How to Trade Forex

All Forex trades result in the buying of one currency and the selling of another (currency trading), simultaneously.

Buying ("going long") the currency pair implies buying the first, base currency and selling an equivalent amount of the second, quote currency (to pay for the base currency). It is not necessary to own the quote currency prior to selling, as it is sold short. A trader buys a currency pair if he/she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up.

Selling ("going short") the currency pair implies selling the first, base currency, and buying the second, quote currency. A trader sells a currency pair if he/she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.

An open trade or position is one in which a trader has either bought or sold one currency pair and has not sold or bought back an adequate amount of that currency pair to effectively close the trade. When a trader has an open trade or position, he/she stands to profit or lose from fluctuations in the price of that currency pair.

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A "pip" is the smallest increment in any currency pair.

In EUR/USD, a movement from 1.2051 to 1.2052 is one pip, so a pip is 0.0001
In USD/JPY, a movement from 130.45 to 130.46 is one pip, so a pip is 0.01

CALCULATING THE WORTH OF A PIP

How much in dollars is this movement worth, for example, per 10,000 Euros in EUR/USD? How much is one pip worth per 10,000 Dollars in USD/JPY? We will refer to the size, in this case 10,000 units of the base currency, as the "Notional Amount". The formula for calculating a pip value is therefore :

(one pip, with proper decimal placement / currency exchange rate) x (Notional Amount)

Using USD/JPY as an example, this yields :

(.01/130.46) x USD 10,000 = $0.77 or 77 cents per pip

Using EUR/USD as an example, we have :

(.0001/.8942) x EUR 10,000 = EUR 1.1183
But we want the pip value in USD, so we then must multiply EUR 1.1183 x (EUR/USD exchange rate): EUR 1.1183 x .8942 = $1.00

This is in fact a phenomenon you will see with any currency in which the currency is quoted first (such as EUR/USD or GBP/USD) : the pip value is always $1.00 per 10,000 currency units. This is why pip (or "tick") values in currency futures, where the currency is quoted first, are always fixed.

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Basic Order Types

GTC Order
Order that is active until it is cancelled by the trader.

Limit-Entry Order
Entry orders are executed the moment the market reaches the order's specified price. Different Entry Order types include, Entry Limit Buy, Entry Limit Sell, Entry Stop Buy, Entry Stop Sell.

Limit Order
The limit order is usually a profit order, or in the event of no existing trade, the limit order represents a buy or sell order below or above the current market price. A limit order is placed when a trade has been put on.

Market Order
A market order is executed immediately at the currently quoted market price. The available market order types includes : Buy and Sell.

OCO Order
A One Cancels Other (OCO) order is two separate entry orders "linked" together that are requested (and managed) as a single order. When either of the two orders is executed, the other order is cancelled.

If/Then Order
An If/Then order is two separate entry orders "linked" together that are requested (and managed) as a single order. When the "If" order is executed, the "Then" order becomes an active entry order.

If/The OCO Order
An If/Then OCO order is three separate entry orders "linked" together that are requested (and managed) as a single order. When the "If" order is executed, the "Then" OCO order becomes an active OCO order.

Day Order
Day order, remains active until the end of the trading day.

Stop-Loss Order
The stop-loss order is a protection order when a position has been taken. It is the maximum possible loss. After a stop-loss order is executed for the same position amount, the position is liquidated and the loss has been taken.

Open Order
An order to buy or sell when a market moves to its designated price.

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Open Position
Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.

Long Position
A position where the trader has bought a currency he/she does not already own. Normally expressed in base currency terms, e.g. long US dollars (short Japanese Yen).

Short Position
A position where the trader has sold a currency he/she does not already own. Normally expressed in base currency terms, e.g. short US dollars (long Japanese Yen).

Hedging
A hedging transaction is one, which protects an asset or liability against an adverse move in the foreign exchange rate.

Structural Hedging
The process of reducing or eliminating currency exposure by matching receivables and payables in each currency or currency bloc to minimize the net exposure.

Leverage
Facility whereby a small margin deposit can control a much larger total contract value, a mechanism, which determines the ability to make extraordinary, profits at the same time as keeping the risk capital to a minimum.

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Round Trip
Buying and selling a specified amount of currency in order to open and close a position.

High/Low
Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

Pip
This is the smallest incremental move an exchange rate can make.

Lot
This is the unit to measure the quantity of the deal. Mini accounts normally use this term. Each lot is 10,000, but the 100k platform refers to a 100,000 trade size.

Spread
The difference between the bid and offer prices; Narrow spreads usually indicate high liquidity.

Margin
A margin is the amount of money used for putting on a trade.

Margin Call
A margin calls happens when the market has moved adversely, i.e. the broker requests to add funds to the margin in order to maintain the trade that is in a trading loss.

Liquidity
The ability of a market to accept large transaction with minimal to no impact on price.

Liquid Assets
Assets that can be easily converted into cash. Examples: money market fund shares, US Treasury Bills, bank deposits, etc.

Hard Currency
A currency whose value is expected to remain stable or increase relative to other currencies.

Cash Market
The cash market is the actual financial market on which a futures or option contracts are traded. There is a physical exchange of funds: therefore the term CASH.

Bull Market
A market distinguished by a prolonged period of rising prices (opposite of bear market).

Bear Market
A market distinguished by a prolonged period of declining prices accompanied with widespread pessimism.