Forex Basics

Foreign The market exchange determines the relative values of different currencies. The price of a currency is actually a reflection of what the market thinks about the current and future condition of a country’s economy compared to other economies on the other hand try to learn forex basics.

When you buy U.S. dollars to British pounds, you are in fact, buying shares of the U.S. economy, expecting the U.S.Economy to outperform the U.K economy.

Example:
In short, the primary task of a forex trader is to buy a currency pair when exchange rates are expected to go up in the future, then sells a currency pair when its exchange rate is expected to fall.

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Currency pairs are divided into majors, crosses and exits. Majors represent developed economies and are highly liquid with low spreads. They are stable and predictable in relation to other asset classes such as small cap equities and stocks.

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forex basics

How to read pair quotes forex basics

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Currency pair quotes may seem confusing at first, but reading them is actually pretty straightforward. In the example above, the EUR/USD quote of1.2302 shows how much one euro (EUR) is worth in US dollars (USD). This means that one euro is worth 1.2302 US dollars. The base currency is always the first one listed in the pairing.

What is pip ?

Price Interest Point represents the smallest alteration in a currency pair.Typically, it is the fourth decimal point, although many brokers quote using the fifth decimal. Nevertheless, the fifth decimal doesn’t really involve the price as it changes really quickly.

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Currencypairs that include the U.S.A dollar, a pip is 1/10,000 of a dollar, whereas when the currency pair includes the yen, a pip is 1/100 of a yen because the yen is closer in value to 1/100 of other major currencies.

What is spread ?

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The difference between the sell quote and the buy quote in pips). The higher the liquidity of a currency, the lower the spread.

 

What is leverage ?

Through the use of leverage, you can invest a small amount of money while trades larger positions through a loan from your broker. When the trade closes, your broker deposits the money into his account. All processes are made automatically through the trading platform. Leverage is presented in the form of a multiplier that shows how much larger the open position is against the margin (the actual investing amount) when it is opened.

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Thetypical options of leverage in forex include 50:1, 100:1 and 200:1. In the US the maximum allowed leverage is 50:1.Anything above 200:1 is considered very high risk. Here’s an example to illustrate how leverage works. In order to open a $10,000 position you can use a margin (investment) of $200 with a leverage of 1:50 ($200 x 50 $10,000).