How to read a currency pair quote.
Forex is a slang abbreviation for Foreign Exchange. Forex is a unique market because, unlike stocks or commoditiy futures, it is open 24 hours a day seven days a week. There are always trades being executed by ndividual investors, corporate trading houses, hedge funds, and banks. The value of a buy/sell currency pair is constantly being moved by the cumulative orders placed by these entities. The rate is also moved by a country's social and political environment as well as the monetary poicy of their central bank. To better understand how all of these factors come together we will focus on the anatomy of a forex quote.
Currencies are traded in pairs. Each currency has an internationally recognized abbreviation, some of these will most certainly be familiar to you. The Euro is EUR, the British Pound is GBP, the Canadian Dollar is CAD, and there is of course the USD or United States Dollar. The three most common pairs are known as"the majors", they are the EUR/USD, USD/JPY and GBP/USD. The first currency in the pair is refered to as the base currency. The USD tends to be the first in the pair for most forex trades as it is the world's reserve currency and is involved in nearly 90% of all forex trades.
These pairs are generally quoted with two numbers, the first being the BID and the second being the ASK ( sometimes known as the offer ). For example, if you see a quote for the EUR/USD for 1.3725/1.3731, this means that traders are prepared to buy Euros with US Dollars at $1.3725 or sell Euros for US Dollars at $1.3731 per Euro. The difference between the two prices is known as the spread.
The profit or loss on a currency trade is measured in pips, or price interest points. A pip is 0.001 of a currency unit. For example, if you buy USD at 1.3725 and sell for 1.4255, you have made a profit of 50 pips.
50 pips may not seem like much, but currencies are traded in lots (minimum 1000 units) and can be leveraged by up to 500:1. Under these conditions a profitable trade of 50 pips can result in a significant gain on one's initial investment. These topics will be covered in future articles, along with technical analysis, chart patterns, money management and more. It is imperative to remember that trading forex is a process of continuous learning and improvement.
Currencies are traded in pairs. Each currency has an internationally recognized abbreviation, some of these will most certainly be familiar to you. The Euro is EUR, the British Pound is GBP, the Canadian Dollar is CAD, and there is of course the USD or United States Dollar. The three most common pairs are known as"the majors", they are the EUR/USD, USD/JPY and GBP/USD. The first currency in the pair is refered to as the base currency. The USD tends to be the first in the pair for most forex trades as it is the world's reserve currency and is involved in nearly 90% of all forex trades.
These pairs are generally quoted with two numbers, the first being the BID and the second being the ASK ( sometimes known as the offer ). For example, if you see a quote for the EUR/USD for 1.3725/1.3731, this means that traders are prepared to buy Euros with US Dollars at $1.3725 or sell Euros for US Dollars at $1.3731 per Euro. The difference between the two prices is known as the spread.
The profit or loss on a currency trade is measured in pips, or price interest points. A pip is 0.001 of a currency unit. For example, if you buy USD at 1.3725 and sell for 1.4255, you have made a profit of 50 pips.
50 pips may not seem like much, but currencies are traded in lots (minimum 1000 units) and can be leveraged by up to 500:1. Under these conditions a profitable trade of 50 pips can result in a significant gain on one's initial investment. These topics will be covered in future articles, along with technical analysis, chart patterns, money management and more. It is imperative to remember that trading forex is a process of continuous learning and improvement.
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