Currency pairs and Trading Made Easy....!

What are currency pairs?

In the foreign exchange market, currency is traded in pairs. Pairs have meaning in relation to each other so must always stay together.

The two currencies in a pair are traded one against the other. The rate at which they are traded is called the exchange rate. The exchange rate is affected by currency supply and demand.

Most common currencies

The most common currencies traded in the market are called ‘majors’. Most currencies are traded against the United States dollar (USD). USD is traded more than any other currency. The five currencies most traded next are: the euro (EUR); the Japanese yen (JPY); the British pound sterling (GBP); the Swiss franc (CHF), and the Australian dollar (AUD). Trades of the six major currencies total 90% of the market.

The most common currency pair is EUR/USD.

The exchange rate

The exchange rate is always changing. The value of one currency is determined by market supply and demand forces, by comparing it to another currency. In a currency pair, the first currency is called the ‘base currency’; the second currency is called the ‘quote currency’ or ‘counter currency’.

When you buy a currency pair, you buy the base currency and sell the quote currency. The exchange rate tells buyers how much of the quote currency they need to buy one of the base currency. The order in a pair always stays the same, being a common approach by the industry. USD/JPY, for example, is a pair (USD = base, JPY = the quote). The order within the pair, in the way you use the term, does not change. So you either BUY it or SELL it, depending on the direction of the trade. For example: USD/JPY – you either BUY JPY using USD or you Sell JPY to get USD. On the currency rate table on the Easy-Forex® website you can view the way in which each pair available for trade is ordered.

Here is an example: EUR/USD 1.2500 means you need 1.25USD to buy one euro. It also means if you sell one euro you get 1.25USD. All trades involve buying one currency and selling another currency at the same time. If in the next day the Euro is rising against the USD and the exchange rate is now 1.26, for every 1 Euro that you bought, you have earned 1USD cent. Or, if you traded the opposite direction, for every EUR that you sold (at 1.25) you lost 1USD cent (since you “buy” back the EUR for 1.26).

Buy and sell currency

Traders in the foreign exchange market buy and sell currency to try to make profit. There are two prices for currency: the buy price, called the ‘BID’; and the sell price, called the ‘ASK’.

The difference between the ‘bid’ and the ‘ask’ is called the ‘spread’. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.

For example: the EUR/USD bid/ask rate is 1.2100/1.2200. The market maker gives $1.21 when buying from the trader, but takes $1.22 when selling to the trader. If traders buy and sell immediately without any change in the exchange rate, they lose money. This happens because of the spread – traders pay more to buy the currency than they receive when they sell in that one moment.

In fact, the spread is the leading source of income for the market maker. Like any other market, the merchant will buy at one price and sell at a higher price.

Quotes

The price of a currency is called the ‘quote’. There are two forms of quotes in the Forex market: direct quotes, and indirect quotes.

A direct quote is the price for one US dollar in terms of another currency.

An indirect quote is the price for one UNIT of another currency in terms of the US dollar.

Please note: in general, most currencies are quoted against the USD (e.g. – “direct quote”).

But, the EUR, GBP, AUD, NZD (as well as Gold XAU and silver XAG) are indirect quoted, for example: GBP/USD.

The quote is the price to a currency pair that the deal will be made with. This is unlike an ‘indication’, where the price given by a market maker is only informational (for trader’s knowledge, rather than for execution). Real time quotes are provided to Easy-Forex® logged in users. Delayed quotes ('indication') are provided to the rest of the site users.

To start getting real time currency quotes, join the Easy-Forex® trading platform for free.
 
Source: Easy-Forex®

Risks and Rewards in the Forex Market

In the Forex market, risks might be great, but the rewards can be great too.

The Forex market is different from other markets. The speed and huge size of the market mean it changes continually. Forex is not the same as any other market in the financial world; it is not able to be controlled. This makes it risky - increased risk means chances for a higher profit, also for higher loss.

There are many different ways to invest in the Forex market. However, before you decide to get involved, you should think about what result you want from your investment and your level of experience. Trading foreign currencies is demanding.

Do not invest money you cannot accept to lose.

What is risk capital?

Risk capital is the money that Easy-Forex® suggests you use for trading in the market. It is money you have that you do not need for day to day living and you can afford to lose.

Can I reduce risk?

You can reduce risk in many different ways. Easy-Forex® has tools to help you make the most of your trading.

First it is important to understand the market. Easy-Forex® has training programs on its website that help you learn about trading. Customers are trained for free. Easy-Forex® believes that good training is necessary for trading success. You can deposit a small amount and do some small trades at first to help you understand how the market operates.

Another way to reduce risk is to try to judge what direction a currency might take by studying what has happened in the market until now and the causes of changes in the market. This is called forecasting. Forecasting helps you to develop an idea what might happen in the market in the near future.

You can also place Stop Loss and Take Profit limits on your trades. This reduces the risk of losing more than you feel comfortable with. Stop Loss and Take Profit help you to control your trading. When you place these limits on your trades, you do not have to watch the computer screen every minute.

Leveraged trading

The leveraged nature of the Forex market means that risks and rewards are higher. Any movement in the market will have an effect on what you win or lose. With leveraged trading, the effect can be increased on a big scale.

You can win a great amount, or you can lose a great amount. This is why it is important to understand the market. It is important to use methods that limit your risk. Learn to be a disciplined trader.

Is foreign exchange trading right for me?

Foreign exchange trading is not the right investment for everyone. If you are responsible and trade to the limits you set for yourself, you will find there are rewards. But you must take risks to get rewards. The risks must be right for you.

Source: Easy Forex

Volatality in Forex

Volatility (in Forex trading) refers to the amount of uncertainty or risk involved with the size of changes in a currency exchange rate. A higher volatility means that an exchange rate can potentially be spread out over a larger range of values. High volatility means that the price of the currency can change dramatically over a short time period in either direction.

On the other hand, a lower volatility would mean that an exchange rate does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

Commonly, the higher the volatility, the riskier the trading of the currency pair is.

Technically, the term “Volatility” most frequently refers to the standard deviation of the change in value of a financial instrument over a specific time period. It is often used to quantify (describe in numbers) the risk of the currency pair over that time period.

Volatility is typically expressed in yearly terms, and it may either be an absolute number ($0.3000) or a fraction of the initial value (8.2%).

In general, volatility refers to the degree of unpredictable change over time of a certain currency pair exchange rate. It reflects the degree of risk faced by someone with exposure to that currency pair.

Volatility for market players

Volatility is often viewed as a negative in that it represents uncertainty and risk. However, higher volatility usually makes Forex trading more attractive to the market players. The possibility for profiting in volatile markets is a major consideration for day traders, and is in contrast to the long term investors’ view of buy and hold.

Volatility does not imply direction. It just describes the level of fluctuations (moves) of an exchange rate. A currency pair that is more volatile is likely to increase or decrease in value more than one that is less volatile.

For example, a common “conservative” investment, like in savings account, has low volatility. It will not lose 30% in a year but neither will it profit 30%.

Volatility over time

Volatility of a currency pair changes over time. There are some periods when prices go up and down quickly (high volatility), while during other times they might not seem to move at all (low volatility).

Source: Easy Forex

Pips and spreads

Pips and spreads show the value of a currency pair to the investor and to the broker.

What is a pip?

A pip is a number value. In the Forex market, the value of currency is given in pips. One pip equals 0.0001, two pips equals 0.0002, three pips equals 0.0003 and so on.

One pip is the smallest price change that an exchange rate can make. Most currencies are priced to four numbers after the point. For example, a five pip spread for EUR/USD is 1.2530/1.2535.

In the major currencies, the price of the Japanese yen does not have four numbers after the point. In USD/JPY, the price is only given to two decimal points – so a quote for USD/JPY looks like this: 114.05/114.08. This quote has a three pip spread between the buy and sell price.

What is the spread?

The spread is the difference between the buy (also called bid) price and the sell (also called ask) price. Two prices are given for a currency pair. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.

If a trader buys any currency and immediately sells it - and no change in the exchange rate has happened - the trader will lose money. The reason for this is that the bid price is always lower than the ask price.

For example, the EUR/USD bid/ask currency rates at your bank may be 1.2015/1.3015. This represents a spread of 1000 pips. This spread is very high compared to the bid/ask currency rates for online Forex investors, such as 1.2015/1.2020 - a spread of 5 pips.

In general, smaller spreads are better for Forex investors because a smaller movement in exchange rates lets them profit from a trade more easily.

The spread is where the market maker will make their money. See Easy-Forex® trading features for information on our spreads.

Source: Easy Forex

Forex Market Maker

What is a market maker?

A market maker provides a platform for foreign currency exchange for the customer.

Market makers know the current cost of investing in the market. They study the buy price and the sell price in foreign exchange. Market makers can help customers to reduce the chances of losing money in the market. They are neither an agent nor an intermediary.

Who are the market makers?

Banks or foreign exchange businesses like Easy-Forex® are examples of market makers. They buy and sell finance resources. They do not charge a percentage to serve each customer.

Do market makers go against a customer’s position?

Market makers work with customers. They buy and sell to people who want to enter the market. They always tell customers both rates: the buy rate and the sell rate. Market makers do not advise customers. Market makers do not act for customers. They help because they can give expert information about different finance positions. Market makers have good policy to reduce risk. Authorities guide the way market makers act.

Do market makers and customers have opposite interests?

Market makers always provide the buy price and the sell price. Customers always know both prices. Market makers are neutral. They do not try to increase their profit by decreasing the customer’s profit. The trade process is based on supply and demand.

Who can influence the market?

The forex market is huge, with trillions of dollars transacted daily and a constant online flow of information across the world. This makes it difficult for an individual trader (person or organization) to influence the market. Easy-Forex® gives you access to to this exciting market through its online trading platform.

How does Easy-Forex® make profit?

With foreign exchange, there is a different price to buy and to sell. This difference is called the ‘spread’ and it is where Easy-Forex® earns money, making a small profit on each deal. Accordingly, Easy-Forex® maintains neutrality (as for the direction of any deals made by its clients), since the leading source of its income is in the spreads.

What is the risk for market makers?

Market makers deal with large amounts of finance and trade. They can combine all their client’s money and use banks to reduce risk. This is called hedging their exposure and by combining all the money, they hedge in bulk giving them a much stronger position. Easy-Forex® works within relevant international regulations as well as its own risk management policy. It cooperates with the world’s big banks: UBS (Switzerland) and RBS (Royal Bank of Scotland).

Source: Easy Forex

Leveraged Forex Trading

What is leverage in Forex trading?

Traders in Forex trade a contract of currency exchange rates. As the movement of currency rates can be very small, traders use leverage to increase their profit potential. Here is a step-by-step, practical example: You decide to open a contract for trade and it has these elements in it: The currency pair for trading – e.g. EUR/USD The direction of the trade - BUY euro and SELL US dollars The price - say 1.3500 The contract value - EUR 100,000 As the trader, you purchase this contract, believing you will profit once you close (offset) the contract.If you are right (for example: the rate increased to 1.3600), then you would profit: for every euro in this contract you made profit of 1 US cent. In total, the profit would be $1,000 (100,000 x 1 cent).


However, do you need ALL the EUR 100,000 to open this contract?


The answer is: NO. You can LEVERAGE the trading: the trader is required to risk, for example, only 1:100 of the contract value. Accordingly, for a contract of 100,000 only $1,000 is needed. However, if there was loss, and the value of the WHOLE contact dropped to 99,000, then the deal is automatically closed, since the “guarantee” made by the trader was only $1,000. Please note that the LEVERAGE offered in the Forex market is usually between 1:50 and 1:200. With leverage, you have more money to use for trading than the balance in your account because you can ‘leverage’ what you do have – that means you use what you have to increase the amount you can trade and to increase your profit when you succeed in trading in the right direction of a currency pair. On the other side, when there is a loss: the higher the leverage, the quicker you are subject to automatic closure of your deal.

How does leveraged trading work?

Leveraged trading works by establishing a rate you can use for every dollar in your account. The money you put for the trade is the actual money you risk. It is called ‘margin’ or the amount you risk. Easy-Forex offers leverage rates from 1:50 up to 1:200 (note: for USA only up to 1:100). For example: If you invest $100 and leverage it at 1:200, then you have $200 to trade for every $1 in your investment (margin). If you start trading with your $100 investment, you can buy up to a value of $20,000 (200x100).

Why does leveraged trading exist?

In the Forex market, leveraged trading exists to create the possibility of making a bigger profit. Leverage is necessary because Forex trades involve very small differences in price. The difference can be a very small part of one cent. With such small amounts, it can take a long time to make a meaningful profit, as well as bigger initial investments. Using leverage, you can get a return on your investment faster and using smaller initial deposits. Forex trades happen very quickly. When you are using leverage, you should be careful. The higher the leverage used the more chance you have of losing your investment when the currency pair is going opposite to your investment. You are advised not to risk more than you can accept to lose.

What is a ‘margin’?

A ‘margin’ is the amount you put into the Forex contract you open (the investment which you risk). Online trading brokers must make sure that traders can pay if they lose money when they trade. Traders put money into an account that can be used to cover any losses they make. This amount is also called ‘minimum security’. With a margin, traders are able to invest in markets where the smallest trade you can make is already high. Margin trading can increase profit, but it can also increase loss.

The profit and loss rates when you leverage your trade

As mentioned, your margin is your investment. Accordingly, you invest a margin of $1,000 for a contract of $100,000. This is a 1:100 rate. If the currency exchange rate moved, for example, 0.5% that would be a 50% change on your margin! Since the contract is 100 times the margin, then the change of 0.5% becomes 100 times bigger, to 50%.

Can you limit your risk?

You can limit your risk by using ‘Stop-Loss’ rates. These rates are decided by you, the trader. You choose a rate that is the lowest you want to go. If the market reaches that rate, your deal is automatically stopped so you do not lose any more money.Because you set the rate, you can control your investment. You can make sure that you do not lose more than you are prepared to. In the same way, you can set a ‘Take-Profit’ rate. Your deal will stop when the profit rate you have decided is reached. Take-Profit makes it easy for you to control your trading without having to constantly monitor your position. You can change your set rates at any time while your deal is open. It is important you know that 100% guarantee for pre-set rates is impossible because market conditions might suddenly affect trading. For example, the market might suddenly change very fast, and those involved in the Forex trade might be unable to execute pre-set rates because the trading environment is suddenly out of their control. Easy Forex aims to make sure that traders are protected as much as possible. Easy Forex makes any and all efforts to guarantee the set rates, unless unusual market conditions prevent them from doing so.
If you wish to get involved in the Forex market click here and join for FREE


Source: Easy Forex