Saturday 29 December 2007

More again about trading currencies in Forex

Currencies are traded on a price interest point (pip)system. Each currency pair has its own pip value. Since we have a listed currency PAIR (i.e., EUR/USD, EUR/AUD), we need a way to talk about its associated number or price. When you see a FOREX price quote, you'll see something listed like this:
USD/JPY: 118:46/51
The first bit (before the slash) refers to the bid price (what you obtain in JPY when you sell USD). In this example, the bid price is 118.46. The second bit (after the slash) is used to obtain the ask price (what you have to pay in JPY if you buy USD). In this example, the ask price is 118.51. The difference between the bid and the ask price is referred to as the spread (how brokers REALLY allow you to trade commission-free). In the example above, the spread is 0.05, or 5 pips.Sometimes you won't see a two-sided quote, consisting of a 'bid' and 'offer'. But, rather, you'll see something like...
USD/JPY: 123.50
When you see a Forex currency pair price quote, like the one above, just remember that the last digit of the price is referred to as the *pip*. So if you see a quote (123.50)and then a quote in one minute of (123.51), the price rose 1 pip. Similarly, if you see a price quote of 187.50 and then after 5 minutes it's (187.58), the price rose 8 pips. The pip is always the last decimal place of the currency price quote.

Your goal in Forex trading is to capture as many profitable pips as possible.

Since the US dollar is the centerpiece of the Forex market, it is normally considered the 'base' currency for quotes. In the "Majors" (this includes USD/JPY, USD/CHF and USD/CAD) and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. In the example above, a quote of USD/JPY 123.50 means that one U.S. dollar is equal to 123.50 Japanese yen. When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote above increases to 124.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound(GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366,meaning that one British pound equals 1.4366 U.S. 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 currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening. Currency pairs that do not involve the U.S. dollar are called cross currencies, but it works exactly the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

I hope this will help you if you feel unsure about how Forex trading works. Of course it works the same whichever Forex trading system you use. But if you use Easy-Forex, you are really at a big advantage because you can learn how it all works WHILE YOU ARE ACTUALLY TRADING and making a profit! So if you find it all a bit confusing, don't let this stop you. Give Easy-Forex a go and enjoy the benefits of their unique personal tutorial system. Learn more at http://www.bizwrite.co.uk/Forex/forexindex.html

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