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First Steps
Table Of
Contents
How a Currency Pair Works.................................................................... 10 We wish you success with your trading............................................ 17
The Forex
Market
The foreign exchange market, also known as the FX or forex market, is the
largest and most traded financial market in the world.
The FX market has grown to a daily trade volume of more than $5 trillion USD -
$5 approximately 200 times bigger than the New York Stock Exchange.
trillion a day Historically, the major players in the forex market were large central banks,
multinational firms and big financial institutions.
While these organisations are still the major players in the market, the growth
of online brokers has made it possible for anybody to access this market and
trade on a level playing field.
The FX market has huge appeal for the retail trader as it is an extremely liquid
market. A liquid market means that there are a huge number of buyers and
sellers resulting in swift trade execution both buying and selling at all times
during market hours.
Continuous Operation
The FX market is open 24 hours a day, 5 days a week. This means we can
24 open and close trades at any hour of the day, unlike in other markets, e.g.
commodities and stocks.
7 The highest volume of trading usually takes place as the various global markets
open throughout the day starting in Sydney, moving on to Tokyo, then
London and finishing in New York.
Due to the high level of liquidity in the FX market most brokers will offer
a higher leverage than for other markets. This means that a trader only
requires a small percentage of the overall price of a position. For example, if
we had leverage of 200:1 and have $500 to invest, we could take a position of
$100,000.
Due to the high level of leverage it is possible to open accounts with FX brokers
from as little as $100. This is a much lower entry level than other types of
investments.
FX brokers mainly generate their revenue from the difference between the buy
and sell prices. This is called the spread and due to the high trading volumes it
is quite a small fee when compared to the fees charged by a traditional stock
broker, for example.
No Market Manipulation
It is impossible for one big player to corner or manipulate the FX market due to
its size. Unlike smaller markets where a large institution may be able to affect
the price by placing a big order, the FX market is so big this will not have a
major impact.
Government decisions, policies and reports, along with other global news
stories are the most likely cause for large movements.
A week later we return to the United Kingdom with $500 left over.
During our holiday the exchange rate changed and now 1 equals $1.25. This
is the equivalent of $1 equalling 0.80. This means that the dollar strengthened
against the pound over that period of time.
So we exchange our $500 back to sterling at a rate of $1 for 0.80 and receive
400 in return.
A countrys currency is a direct reflection of what the market thinks about the
current and future health of its economy. A recessionary, stagnant economy
will result in a weak currency, while a growing economy will result in a strong
currency.
The majors are the currencies of the biggest global economies the US, Japan,
UK, Euro Zone, Canada, Australia, Switzerland and New Zealand.
The majors are by far the most frequently traded currencies and make up
around 90% of the FX market.
Works currency to the right is called the secondary currency. The secondary currency
tells us how much it is worth against 1 unit of the base currency.
The base currency is the basis for the buy or the sell trade. If we believe that
the Euro will strengthen against the US Dollar we would buy the EUR/USD pair.
This means we are buying the base currency (the Euro) and simultaneously
selling the secondary currency (the US Dollar).
If we believe the Euro will weaken against the US Dollar we will sell the pair. In
this case we are selling the Euro and simultaneously buying US Dollars.
Buying the base currency is known as going long looking to profit from the
pair rising.
When we sell the base currency it is known as going short and we are trying
to profit from the currency pair falling.
Pair Countries
EUR / USD Euro Zone / United States
or Cross-
EUR / CHF Euro Zone / Switzerland
EUR / NZD
Euro Zone / Australia
Currency pairs that do not contain the EUR / JPY Euro Zone / Japan
These pairs are not traded as often as the majors or minors, so often the
cost of trading these pairs can be higher due to the lack of liquidity in these
markets.
Pair Countries
EUR / TRY Euro / Turkish Lira
So the value of one is reflected through the value of another. The base
currency is to the left of the pair and the secondary currency is to the right.
In this case the Pound Sterling is the base currency and the Japanese Yen is the
secondary currency.
Therefore: 1 = 149.50
We have the sell price (also known as the bid price) and the buy price (also
known as the ask price).
The bid price is the best available price at which we can sell to the market.
BUY
The ask price is the best available price at which we can buy from the market.
1.73 59 The difference between the two prices is what we call the spread and this is
how a broker generates revenue. It is the cost of placing a trade.
SELL
In this case we can see the EUR/USD has a bid price of 1.31819 and an ask
1.73 34 price of 1.31849. The difference between the two is 0.0003 or what we call
three pips.
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The content in this e-book is for general informational purposes only and is not intended to
provide trading or investment advice. AvaTrade/HushTrade will not be held responsible for
any loss you may take directly or indirectly arising from any information provided through the
information in this book. Trading forex, CFDs, options and/spread betting on margin carries a high
level of risk and may not be suitable for all investors.