What moves individual currencies and how are they quoted?
ONE OF THE BEST BENEFITS OF FOREX TRADING IS
All that can be lost is the amount of money required to conduct a transaction (known as "margin").
You should be aware that, despite the super-high leverage given by some Forex brokers (400:1); that is, if you put up $1,000, the broker will enable you to trade as if you had $400,000.
Forex trading is still less hazardous than stock or futures trading, where you can lose more money than you invest.
1. This kind of LEVERAGE DOES NOT EXIST IN THE MARKET FOR EQUITIES OR FUTURES
In the equity or futures markets, unexpected and dramatic swings occur frequently, against which you cannot protect yourself, even if you have put protective stops.
Your position may be liquidated at a loss, and you will be responsible for any resultant account deficit.
However, due to the FX market's high liquidity and 24-hour trading, hazardous trade gaps and limit movements are practically non-existent.
Orders are filled in a timely manner, with no slippage or incomplete fills. Finally, no margin calls are made. To safeguard you, the broker will automatically close down any or all of your open positions if your account equity falls below the minimum necessary to keep the positions open.
Consider this a last, automatic halt, constantly working on your behalf to avoid a negative balance.
2. Currencies are exchanged in dollar increments known as “LOTS.”
Most Forex brokers provide you the option of trading in one of two lot sizes. Standard Lots or Mini lots are available.
One Standard lot is worth $100,000 in cash. Using a 400:1 leverage, the margin requirements would be US$ 250, implying that you hold $100,000 worth of currency for just $250 US dollars.
3. Do you imply that if I deposit $250 with a broker, I can trade $100,000 in currency?
NO, however, keep in mind that your account must be larger than the necessary margin of US $250. For example, if you place an order to purchase 1 Standard lot (@100,000) of USD/JPY and it is quoted at 112.10/112.13, you will buy USD/JPY at 112.13.
Because you paid 3 pips, or $30, for this deal, your account balance would be $220. If you want to terminate this transaction right away, you must sell it at 112.10 (the offer price) for a $ 30 loss.
In actuality, you would not be able to execute this transaction since the broker's trading platform would reject your order due to insufficient money in your account).
As a result, your account balance must be at least $280. The margin is $250, and the trade is $30.
BUT...IF, after initiating the trade to purchase USD/JPY at 112.13, the USD/JPY falls the following second 1 pip (about $8), your position will be instantly terminated due to a margin deficit.
I'll go into more detail on having a sufficient account size to trade the Forex market later.
In FOREX, currencies are always exchanged in pairs. The currency pairings are denoted by a unique notation that specifies which currencies are being exchanged.
A currency pair's symbol will always be in the form ABC/DEF. ABC/DEF is not a genuine currency pair; it is an example of a currency pair symbol. In this example, ABC represents one country's money while DEF represents another country's currency.
4. The most frequent Forex symbols
- The US Dollar is abbreviated as USD.
- EUR - The European Union's currency "EURO"
- GBP - British Pound, often known as cable
- The Japanese Yen is abbreviated as JPY.
- The Swiss Franc is denominated in CHF, while the Australian Dollar is denominated in AUD.
- The Canadian Dollar is abbreviated as CAD.
Other currencies have their own symbols, but these are the most widely traded.
A currency cannot be exchanged on its own. As a result, you can never trade the USD on its own. To make a deal feasible, you must always BUY one currency and SELL another.
5. The most often traded currency pairs
- EUR/USD Euro vs. US Dollar
- USD/JPY The value of the US dollar in relation to the Japanese yen.
- GBP/USD The British Pound vs the US Dollar.
- USD/CAD The US dollar vs the Canadian dollar
- AUD/USD The Australian Dollar vs the US Dollar
- USD/CHF The US dollar vs the Swiss franc
- EUR/JPY Euro vs. Japanese Yen
- The currency to the left of the / is referred to as the base currency.
- The /'s currency right is known as the counter currency.
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