Basics of Currency Trading
Currency Trading Basics
We thought we would start from the beginning and briefly present you with currency trading basics for a good start. It's always good to refresh your memory, especially when it comes to forex.
All currencies are assigned an International Standards Organization (ISO) code abbreviation. The traded currency pairs are usually expressed through this code. For example, USD/JPY refers to two currencies: the US Dollar and the Japanese Yen.
Currency Exchange Rates
The term exchange rate might not be easy to grasp at the beginning but what it essentially means is simply the ratio of one currency against another. Two currencies in the pair have different designations; the first one is referred to as the base currency and the second as the counter or quote currency.
Ex: USD/DEM (US dollar, the base currency, against German mark, the quote currency) It is always the base currency that gets most of the attention, so to speak. When you want to buy, you buy the base currency in exchange for the quote currency. The exchange rate, in other words indicates how much you have to pay in the quote currency to obtain one unit of the base currency. If you want to sell, you sell again the base currency and the exchange rate indicates how much you get in the quote currency when selling one unit of the base currency.
Spot Forex
What is this spot forex trading you hear so much about? Forex trading is called spot trading due its high liquidity, meaning that positions can be opened and closed immediately on the live tradable price quoted through the Forex Trade. These trades are short term, by definition. In spot forex one currency is always traded in relation to another. So, a trader who believes that the dollar will rise in relation to the Euro, would sell EUR/USD. Can you guess what he'll sell? That right! He'll sell Euros and buy US dollars.
| Symbol | Currency Pair | Trading Terminology |
|---|---|---|
| GBP/USD | British Pound / US Dollar | "Cable" |
| EUR/USD | Euro / US Dollar | "Euro" |
| USD/JPY | US Dollar / Japanese Yen | "Dollar Yen" |
| USD/CHF | US Dollar / Swiss Franc | "Dollar Swiss", or"Swissy" |
| USD/CAD | US Dollar / Canadian Dollar | "Dollar Canada" |
| AUD/USD | Australian Dollar / US Dollar | "Aussie Dollar" |
| EUR/GBP | Euro / British Pound | "Euro Sterling" |
| EUR/JPY | Euro / Japanese Yen | "Euro Yen" |
| EUR/CHF | Euro / Swiss Franc | "Euro Swiss" |
| GBP/CHF | British Pound / Swiss Franc | "Sterling Swiss" |
| GBP/JPY | British Pound / Japanese Yen | "Sterling Yen" |
| CHF/JPY | Swiss Franc / Japanese Yen | "Swiss Yen" |
| NZD/USD | New Zealand Dollar / US Dollar | "New Zealand Dollar" or "Kiwi" |
| USD/ZAR | US Dollar / South African Rand | "Dollar Zar" or "South African Rand" |
| GLD/USD | Spot Gold | "Gold" |
| SLV/USD | Spot Silver | "Silver" |
Continue to: Forex Order Types