Currency Pairs
Many different currencies are traded every day. Traders buy and sell these currencies to make a profit. You don’t need any special skills to trade. You simply need the knowledge and the ‘know how’ to do the same. That is exactly what I will teach you in this manual.So how do you make money trading currencies?
Let’s start with an example.
Let’s say 1 British Pound is worth 2.045 US Dollars. This means that if you go to the currency exchange kiosk at your local airport and you give them £1 in exchange for dollars, they will give you $2.045 (in return for your £1 – disregard any commission for now).
You saw the news on TV and now you believe that the Dollar will get stronger against the Pound and so you buy many dollars.
Let’s say you gave the kiosk £100 in exchange for $204.50 at the exchange rate of 2.0450.
100 x 2.0450 = $204.50
A few hours later, you see that the exchange rate has changed and now every Pound is worth 1.90 US Dollars. This means that the dollar has increased in value against the Pound. Before, each pound was worth 2.04 US Dollars but now it is only worth 1.90 US Dollars. In other words, the Pound has become weaker against the US Dollar and the US Dollar has become Stronger against the Pound. You will see this as you go back to the kiosk and re-exchange your Dollars back to Pounds. So if each Pound is worth 1.90 US Dollars, how many pounds do you get for $204.50?
$204.50 / 2.90 = £107.63. This means you have just made yourself a profit of £7.63. You only had £100 before but now you have £107.63.
Trading currencies at home works on the same principle except you will be doing it on a larger scale and without the hassle of visiting kiosks and their inflated rates. Listed here are some of the currencies you can trade on the FX market along with their abbreviations:
You can’t just trade any currency against any other currency. You can only trade what is available to you. Currencies are traded in set pairs. From the ‘dealing rates’, you can see the ‘set pairs’ which are available and you can see that currency 1 (Cur1) is traded against currency 2 (Cur2). Each currency is abbreviated. Whatever is quoted under Currency 1 is the base currency.“Buy” GBP/USD means I am buying the Pound and selling the US Dollar. “Sell” GBP/USD means I am selling the Pound and buying the US Dollar.
So you see, you will be trading set currencies against each other. When prices change, you stand to make a profit or a loss. Later, you will learn how to trade in a manner which will produce a good positive income by trading the right currencies at the right time.
The exchange rate (in simple terms) is the ratio of one currency valued against another. The first currency is known as the base currency and the second currency as the counter or quoted currency. For example, the AUD/CAD exchange rate specifies how many Australian Dollars are required to buy a Canadian Dollar, or conversely, how many Canadian Dollars are needed to purchase an Australian Dollar.
There are 2 prices quoted for each currency pair – the BID price and the ASK price.
The ask price is what you pay if you are buying the currency pair and the bid price is what you pay if you are selling the currency pair.
Have a look at the GBP/USD price above. It is quoted as 2.0458/2.0462 which may also be shown as 2.0458/62.
If you buy the GBP/USD, you will pay the price of 2.0462. If you then decided to sell it straight away, you would sell it at a price of 2.0458. This means you would have made a loss, as the bid price is always lower than the ask price. This is quite normal and the trades you undertake will take this into account.
As soon as you place a trade, you are already in a loss situation. This means that you will have to recover this loss amount as well as make a profit on top for a successful outcome. Don’t worry about this instant loss for now as it will all become clear as you read on. Just accept it for now.
The difference between the bid and ask price is known as the spread.
To clarify the bid and ask components, a currency exchange rate is shown as a bid price and an ask price. The bid price is always lower than the ask price. The bid price shows the price which will be obtained in the counter currency when selling one unit of the base currency. The ask price represents what has to be paid in the counter currency to obtain one unit of the base currency.
Have a look at this as an example:
EUR/USD: 1.4259/61
The first part (before the slash) is showing the bid price (what you obtain in USD when you sell the Euro - Sell EUR/USD). In this example, the bid price is 1.4259. The second part (after the slash) is the ask price (what you have to pay in USD if you buy the Euro – Buy EUR/USD). Here, the ask price is 1.4261.
If you buy a currency (at the ask price) and sell it straight away (at the bid price), it may be obvious to you that you would always lose out because the ask price is always higher than the bid price. This difference (spread) is where the broker takes his cut. So, instead of charging you commission for every trade, he makes his money by taking a little chunk out of every trade you place. The spread is something which all traders have to live with. It is something you will need to take into account when placing a trade.
However, when you deal with profits of $1000 every week, the spread is negligible. Although there are scores of currencies being traded around the world, there are 4 major currency pairs and these are traded more than any other. When starting out, you are advised to stick with these ‘4 majors’ until you become more proficient in trading.
They are – EUR/USD, GBP/USD, USD/JPY and USD/CHF.
When you buy or sell a particular currency, you are placing a trade which is also known as opening a position. When you exit that trade (either with a profit or loss), you are said to be closing that position. You will notice a similarity between the EURUSD pair and USDCHF price movement.
When one of these rises, the other will fall and vice versa. No need to know why at this point. Just know that it does. When you see a currency pair which does not include the USD, it is said to be a cross pair. For e.g. the EUR/JPY is a cross pair as it does not have the US Dollar as one of the pairs. Cross pairs are traded in a different manner from the 4 major pairs. As a beginner, forget trading the cross pairs as some of the techniques taught in this manual will not work on those pairs.
posted by Forex 1 million is possible @ 5:27 PM
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