Forex Education

Know How It Ticks

What Currencies Are Traded?

If I went through all of them it would be a very long list so I am going to tell you the
top 8:

Symbol	Currency	Country	Also Called
GBP	Puound	Britan	Sterling
USD	U.S. Dollar	America	Dollar
EUR	Euro	Euro nations	Euro
JPY	Yen	Japan	Yen
AUD	Aussie Dollar	Australia	Aussie
CHF	Franc	Switzerland	Chef, Swissy
CAD	Cad Dollar	Canda	Loonie
NZD	N.Z. Dollar	New Zealand	Kiwi

Hungry For Money? Eat Some Pears!

It’s ‘pairs’ soldier! When you see a Forex quote it is being quoted as a pairing of two currencies. A pair and its price is basically the summary of a sentence like this one:

One British Pound is currently worth about two U.S. dollars.

One GBP unit is currently worth about Two USD units

GBP vs. USD = $2.04

GBP/USD = 2.0414

There are countless combinations of pairs such as GBP/JPY, USD/JPY and EUR/USD. It is all the same though, using GBP/JPY as an example we say:

One British Pound is currently worth about 238 Japanese Yen

OR

GBP/JPY = 238.19

The fist currency in the pair is referred to as the base currency and the second is referred to as the quote currency. Every trade involves Buying one currency and Selling another. Buying GBP/JPY simply means that you are buying GBP and selling JPY. Selling GBP/JPY simply means that you are selling GBP and buying JPY. If you do not understand that do not worry. You will pick it up as you go along.

Long or Short or Both....

If you are new to the entire financial market scene you are probably going to have a hard time wrapping your head around this one (I know I did). You can either buy a position, sell a position, or sometimes buy and sell a position simultaneously. What a headache right? WRONG SOLDIER! It is a simple concept that you will learn to understand very quickly.

Just above I wrote about the base currency and the quote currency. When you buy a pair you are buying the base currency and selling the quote currency.

So now when the GBP gains value you make money. When the JPY losses value you also gain money. If only GBP gains value while JPY stays still or only JPY losses value while GBP stays you make money. Basically whater causes the British Pound to rise in value against the Japanese Yen is good for you. However If JPY gains and GBP losses, you lose money.

If you go short you are selling GBP and buying JPY:

So now when the GBP loses value you lose money when the JPY gains value you gain money. If JPY however loses and GBP gains you lose money.

The last one is a simultaneous long and short which is referred to as hedging:

Now you have two different positions in different directions on the same pair so if GBP gains value you both lose and gain the exact same amount, if JPY gains you both lose and gain the same amount. It sounds useless. Well, it kind of is if you do not know how to apply it. I personally do not hedge but I know many traders who use hedging successfully.

Spreads

The simplest explanation of a spread is that a spread is one of the main ways your broker makes money from you. However we need a more detailed explanation than that so here it is. Take a look at this quote from a Forex broker:

Forex quotes are always provided with bid and ask prices. The bid price represents the price at which your broker is willing to sell (short) you the currency at, the Ask price is the price they are willing to let you buy (long) the currency at.

Whenever you buy a pair the only way to get rid of it is to sell it and when you sell the only way to get rid of it is to buy it.

So let's take the pair above as the example and say we just bought GBP/USD at 2.0418 if we want to sell it right now the second we bought it we can sell it at 2.0414. This means we immediately lose as we sell it for less than we bought it. So as soon as you buy you are already a slight bit behind. Your goal as a trader is to wait for that price to move up. When the bid price moves up to 2.0419 you are profitable, you are profitable by very little but you are profitable.

So if you hit the sell (short) button the broker will give you an entry at 2.0414

If you hit the buy (long) button the broker will give you an entry at 2.0418

The price in between is the spread and that is what the broker pockets when you make a trade.