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Forex Basics How is FX traded? Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second currency is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you buy EUR/USD you have bought Euros (and simultaneously sold dollars). You would do so in expectation that the Euro will appreciate (go up) relative to the US dollar. FX is traded in lots, which represent 100,000 units of the base currency. If the EUR/USD is quoted at 1.2253, that means that one Euro is currently worth just over $1.22. If the market moves from 1.2253 up to 1.2254 that represents a move of one pip. A pip is the smallest increment a currency pair can move and in the case of the EUR/USD currency pair a pip is worth $10 in a 100K account and is $1 in a mini account. Example of an FX Trade If you think that the Euro will rise relative to the U.S. Dollar you would buy one lot of the EUR/USD currency pair. The EUR/USD is trading at 1.2553 when you buy it. The EUR/USD is trading at 1.2674 when you sell it. You bought at 1.2553 and sold at 1.2674 for a profit of .0121 or 121 pips. Each pip is worth $10 in the 100K account. 121 pips x $10 = $1,210 profit In FX, you also have the opportunity to short (sell first) a currency pair if you think it will fall in price. If you think that the Euro will fall relative to the U.S. Dollar you would sell one lot of the EUR/USD currency pair. The EUR/USD is trading at 1.2659 when you sell it. The EUR/USD is trading at 1.2523 when you buy it. You bought at 1.2523 and sold at 1.2659 for a profit of .0136 or 136 pips. Each pip is worth $10 in a 100K account. 136 pips x $10 = $1,360 profit While these are profitable examples, remember that ending up on the wrong side of a trade can cost you a lot of money. A currency pair represents the exchange rate between the two currencies. For example, the rate at which the EUR/USD is trading that represents the number of US Dollars one Euro can purchase. The first currency is called the base currency and the second currency is called the counter currency. An example of how currency pairs trade is if a trader believes the Bank of Japan will intervene to cause a decrease in the Yen against the US Dollar, then the trader would buy USD/JPY (buy the US Dollar/sell the Yen). However, if the trader believes that Japanese investors are losing faith in the United States' economy and are pulling money out of the US into Japan, then the trader would sell USD/JPY (sell the US Dollar/buy the Yen).
Currency Pairs What is the significance of currency pairs?
This is an example of how currency pairs are listed on trading stations.
The currency pairs are listed on the left side of the column. The sell price is the level at which a trader can sell the currency pair and the buy price is the level at which a trader can buy the currency
The Concept of Leverage What is leverage? Leverage allows traders to borrow money and use that money to invest in the foreign exchange market. Because of leverage, clients without a huge amount of capital are able to make large investments, whereas in other markets such as the equities market, clients would have to pay 50% of the full amount for each share of stock they were investing in. Most market makers allow positions to be leveraged up to 100:1. This means that if a trader wanted to buy a "lot" worth $100,000, with 100:1 leverage the trader only has to put up $1,000. Leverage is about risk. Increasing your leverage increases both your opportunity to take bigger profits AND rack up bigger losses.
It's easy to see in this graph that the amount of margin required in taking positions in the currencies market is much less than in the equities and futures markets.
What is margin? Margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value. FXCM' s online trading platform has margin management capabilities, which allow for this high leverage. FXCM's most lenient margin requirement is .5%. In the event that funds in the account fall below margin requirements, the FXCM Dealing Desk may close some or all open positions. This prevents clients' accounts from falling into a negative balance, even in a highly volatile, fast mo... [download for more]
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