How are Currencies quoted and what drives individual currencies?
The amount of money you need to trade (known as “margin”) is all that can be lost!
You must know, that despite the very high leverage offered by some Forex brokers up to (400: 1); meaning that if you put up a $ 1000 broker it will allow you to trade like you really have $ 400,000).
Forex trading is still less risky than Stock Trading or Futures, where you can lose more than you deposit in your account.
This type of LEVERAGE is NOT in the equity market or futures
In the Equity or Futures market, very often, sudden and dramatic movements occur, with which you cannot protect yourself, even by placing your cessation of protection.
Your position may be liquidated and lost, and you will be responsible for any deficits that occur in your account.
But because of the liquidity of the deep and 24-hour FX market, continuous trade, the trade gap is dangerous, and limited movement is almost eliminated.
Orders are executed quickly, without slippage or partial filling. And finally, there are no margin calls. For your protection, the broker will automatically close some or all of your open positions if the equity of your account falls below the level needed to hold that position.
Think of this as the last and automatic stop, always working on your behalf to prevent debit balances.
Currency is traded in dollar amounts called “LOTS”
In Forex trading, with most Brokers, you have a choice between 2 different lot sizes.
Standard Lot or Mini Lot.
One standard lot is equal to $ 100,000 in currency. Margin requirements, using Leverage 400: 1, will be US $ 250, in other words you control the value of the $ 100,000 currency with only 250 US dollars.
You mean, depositing $ 250 with a broker, can I trade $ 100,000 worth of currency ???
NO, know, that your account size must be more than the required margin of US $ 250. For example, if you order to buy 1 Standard lot (@ 100,000) USD / JPY and USD / JPY quoted as 112.10 / 1212.13, you buy USD / JPY at 112.13.
Your account balance will be $ 220, because you pay 3 pips or $ 30 for this trade.
If you will close this trade immediately, you must sell it at 112.10 (bid price), with a loss of $ 30.
Even you cannot be executed on this trade, because the broker trading platform will reject your order, for reasons not enough funds in your account).
So, your account balance must be a minimum of $ 280. $ 250 for margin and $ 30 for trading.
BUT … IF, after you start trading to buy USD / JPY at 112.13, and USD / JPY down the second second pip (around $ 8), your position will be closed automatically, because of the margin deficit.
I will explain later about having an adequate account size to trade the Forex Market.
Currency is always traded in pairs on FOREX. This pair has a unique notation that reveals what currency is traded.
The symbol for the currency pair will always be in the form of ABC / DEF. ABC / DEF is not a real currency pair, this is an example of a symbol for a currency pair. In this example, ABC is a symbol for one country currency and DEF is a symbol for another country’s currency.
Some of the most commonly used symbols in Forex are:
- USD – US Dollar
- EUR – European Union currency “EURO”
- GBP – British pound
- JPY – Japanese Yen
- CHF – Swiss Franc
- AUD – Australian Dollar
- CAD – Canadian Dollar
There are symbols for other currencies too, but this is the most frequently traded.
A currency can never be traded by itself. So you can not ever trade the USD by itself. You always need to BUY one currency and SELL another currency to make a trade possible.
Some of the most traded currency pairs are:
- EUR/USD Euro against US Dollar
- USD/JPY US Dollar against Japanese Yen
- GBP/USD British Pound against US Dollar
- USD/CAD US Dollar against Canadian Dollar
- AUD/USD Australian Dollar against US Dollar
- USD/CHF US Dollar against Swiss Franc
- EUR/JPY Euro against Japanese Yen
When you place an order to buy the EUR/USD, for instance, you are actually buying the EUR and selling the USD.
If you were to sell the pair, you would be selling the EUR and buying the USD. So if you buy or sell a currency PAIR, you are buying/selling the base currency.
The best way to remember is, by just thinking of the entire currency pair as one item.
If you buy it…you buy the first currency and sell the second currency. If you sell it…you sell the first currency and buy the second currency.
That means you would to be able to short-sell with no restrictions so you could make money when the market drops as well as when it rises.
The problem with traditional stock market or commodity trading is that the market has to go up for you to make money. With FOREX trading you can make money in all directions.