Introduction to Forex
Forex is the speculation of the value of one currency versus the other. Forex currencies are always traded in pairs you are exchanging one for the other ex. Euro dollar versus the US dollar EUR/USD.
Forex or Foreign exchange trading is traded weekly and begins trading in Australia on Monday at 10 am and ends in the US on Friday at 5 pm eastern time in New York. There is no central market, trading is conducted in whichever market is open which allows for trading 24 hours per day.
The most frequently traded pairs are the major pairs
EUR/USD euro and the us dollar
USD/CHF us dollar and the swiss franc
GPB/USD british pound and the us dollar
USD/JPY us dollar and the Japanese yen
USD/CAD us dollar and the Canadian dollar
NZD/USD new zealand dollar and the us dollar
AUD/USD australian dollar and the us dollar
The first currency is called the base currency and the second is the counter currency ex. EUR/USD the EURO is the base currency and the US dollar is the counter currency.
The base currency is always valued at 1 ex. EUR/USD 1.555. The Euro dollar is valued at 1 the US dollar valued at 1.555
For every 1 euro exchanged you would receive $1.555 American dollars
A rising quote means your base currency has increased in value and your counter currency has weakened
Ex. EUR/USD 1.555 To a Quote of EUR/USD 1.777 (euro has increased ,us dollar has decreased)
Forex trading involves buying one pair and selling the other at the same time, there are two prices the bid and the asking price.
Bid price and Asking price
The bid price is the price you can sell the base currency.
Bid prices are always located on the left
Ex. eur/us 1.444 1.555 (1.444 is the bid price or selling price)
The asking price is the price you can buy the base currency.
Asking prices are always located on the right.
Ex. eur/us 1.444 1.555 (1.555 is the asking price or purchase price)
The center piece of the Forex market is the US dollar and is considered base currency for quotes. If the US dollar is the base currency think of it as telling you what the US dollar is worth in that currency. When the US dollar is the base currency and the price goes up this means the US dollar has strengthened in value and the currency it is paired with has weakened in value. Rising prices means the dollar can buy more of that currency.
There are three exceptions to the rule they are the
1. British pound (GBP) 2.Australian dollar (AUD) 3.Euro (EUR).
When paired with the US dollar and the US dollar is not the base currency a rising quote means the US dollar is weakening and buys less of that currency. With these three exceptions when the currency quote goes higher the base currency is getting stronger when the quote is lower the base currency is becoming weaker.
There are currencies that do not involve the US dollar the principle is the same, these currency pairs are called cross currencies.
There are two examples below
EUR/JPN Euro versus Japanese yen
EUR/GBP Euro versus British pound
The difference between the bid and ask price is the spread.
The tighter the spread the more liquid the currency pair.
The wider the spread the less liquid the currency pair.
A pip (price in percentage) is the 4th or 5th digit to the right of the decimal.
Place and is the amount of change in the bid or asking price.
Ex. eur/usd 1.4445
In pairs involving the Japanese yen a pip is the 2nd digit to the right of the decimal place.
Ex. eur/jpn 80.99
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