Introduction to the Forex
The purpose of trading on any market is to buy low and
sell high. The foreign currency market FOREX is no exception. The goods traded
on this market are rates of currencies of different countries. As any other
goods the currencies have their prices.
To settle transactions between businesses located in
different countries, governments, speculative transactions and so forth, banks
around the world execute currency trades on FOREX market. Depending on various
trade, economical and other parameters, interest rates, central bank policies,
time of the day, preferences and anticipations of the market players, and many
other causes, the rates, that is prices, of currencies stay in ceaseless
motion.
Your task as a trader is to determine the trend of the
rate and buy an appreciating currency or sell a depreciating one, and then take
your profits through execution of a reverse transaction.
Our dealing center gives you the opportunity to use
software to obtain real time currency quotations from different banks and
largest world exchanges participating in FOREX market. At the same time, the
rate charts for every currency are displayed for you, and hottest economical
News that may affect currency rates now or in the future directly or indirectly
are fed to your screen.
And, at last, you will have a special trading account
allowing you to buy and sell desired currencies. Despite of having US dollars
in your account, you may start your trading from selling japanese yens not
concerning yourself with not having bought them in advance.
Some codes, numbers and definitions.
Each currency is assigned a three-letter
code. For example, US dollar is coded – USD (United
States Dollar), euro is coded EUR (EURo), Swiss frank is coded CHF
(Confederation Helvetica Franc), Japanese yen is coded JPY (JaPanese Yen),
British pound is coded GBP (Great British Pound). Currency rates are equal to
ratios of currency units of different countries relative to each other. The
rates are represented by 6-letter words composed of two three-letter currency
codes. The first position is occupied, as a rule, by the code of a more
expensive currency. The rates are expressed in units of the second currency per
unit of the first one. For example, rates USDCHF (USD-CHF) show the number of
Swiss franks in one US dollar, but rates GBPUSD (GBP-USD) show the number of US
dollars having to be paid for one British pound.
The rates are usually expressed as five-digit numbers.
For example, USDJPY = 121.44 means that 1 US dollar is valued at 121.44
Japanese yens (i.e. they are willing to pay you that many yens for one US
dollar while you are buying or selling). At the same time, GBPUSD = 1.6262
means that 1 British pound is valued at 1.6262 US dollars. Generally, if the
rate XXXYYY = Z, it means that one unit of XXX is worth Z units of YYY.
When the rate has changed, for example USDJPY = 121.44
to USDJPY = 121.45 or GBPUSD = 1.6262 to 1.6263, they say that the rate has
moved 1 point. As it follows from the information above, yen in this example
has DEPRECIATED by 1 point, but the pound has APPRECIATED, also by 1 point.
While watching the charts, you should keep in mind
that only euro (EURUSD) and British pound (GBPUSD) charts reflect real
movements of the rates of these currencies (that is, chart going up, means
increasing price), as growth (that is, charts moving up) mean decreasing rates
(prices) for the other currencies.
Your trading account is kept in US dollars, this
is why it would help to know the worth of this 1 point expressed in other
currencies. The point’s
worth is determined by the following algorithm: you should divide the size of a
lot by the rate disregarding the position of the decimal point. For example, in
the example above the worth of one point USDJPY expressed in US dollars =
100000 / 12144 = $8.24. Or, for GBPUSD one point’s worth = 100000 / 16262 =$6.15. Consequently, the
worth of one point is different not only for different currencies, but also for
the same currency in different quotations.
It is known, that every transaction is executed at a
rather well defined and concrete price, while the table Quote Spread Sheet
lists three prices for each currency, for example:
Each of the participants of FOREX market enters
each trade as either a SELLER or a BYUER of a particular currency. In so doing,
the seller offers the currency at a higher price, for example GBPUSD at 1.6325,
while the buyer bids for it at a lower price, for example, GBPUSD at 1.6322.
The seller’s price is called ASK and
the buyers price is called BID accordingly. This is why, if you anticipate
GBPUSD to appreciate (your GBPUSD chart to go up), then you should decide to
buy the pound when it is low to sell it high later. You can BUY only from a seller
offering it at the price equal to ASK. Should you be selling the pound (this
operation is called SELL), the buyer will bid at a price equal to BID for it
(this holds true for all currencies). The obvious conclusion is that if you
have OPENED a !! position (the operation is called OPEN), that is you have
executed BUY GBPUSD, and want to CLOSE it immediately (the operation is called
CLOSE), that is to sell the pounds you have just bought, then you could do it
only at a loss, similar to what would happen at any currency exchange booth.
Consequently, to make a profit you should let the rate move in the anticipated
direction more than the difference between BID and ASK. The third number is
called LAST, which is an average of last BID and ASK on Forex.
To sum up, for USDCHF and USDJPY OPENING of a SHORT
position (that is BUY) is executed at the BID price, and the CLOSING at the ASK
price respectively; correspondingly OPENING of a LONG position (that is SELL)
is executed at the ASK price, and CLOSING at the BID price.
For GBPUSD and EURUSD OPEN BUY (up) occurs at the ASK,
ànd CLOSE at the BID, while OPEN SELL (down) happens at the BID, ànd CLOSE at
the ASK.
Forex Trading Tools
Let us get acquainted with some useful trading tools
allowing us to protect ourselves from unforeseen losses to certain degree and
take the expected profits.
These are STOP and LIMIT. For a previously opened
position an instruction may be entered at any moment (during the working days)
to close it, if the rate reaches a preset level. For example, you have opened a
position expecting the rate to go up (on the chart). To protect yourself from
significant losses if the rate moves down, especially in such a situation when
you don’t have or are about to
lose control of the market, you should enter a STOP, that is set a price at
below its current value at which your position should be closed with no further
instructions. Similarly, if you have opened a down position, then you should
specify a price above its current value. In this case you should bear in mind
that if the STOP is set too closely to the current rate value, then a random
rate fluctuation may close a correctly open position at a loss, but if it is
set too far, then the losses could become unreasonably high. LIMIT is a rate
value that you set at which the position should be closed with a profit, that
is the value of the LIMIT should always be above the current level, if you play
long, and below it, if you play short. It should be noted that STOP and LIMIT
should differ by more than 20 points from the current values of BID or ASK (in
accordance with what side of the market you play and which of these tools you
use).
A few more words about the differences between
operations and service in a training and a real trading accounts.
In the quoting mode of a training account real
quoting does not occur, and the offered price corresponds to slightly modified
BID/ASK ratio (depending on whether you play long or short). Naturally, with a
real account the offered price does not usually coincide with the value of
BID/ASK (the difference is 1-2-3 points in a calm market, more often than not
it’s not in your favor).
The time lag between a rate inquiry and the receipt of
a quotation (about 10 s) in a training account simulates the real-life lag
rather well (usually 40-50 s, sometimes longer). It should be kept in mind,
though, that the quoted rate is equal to the rate at the moment of quoting,
rather than the moment of inquiry.
The rest of dealing with real and training accounts is
essentially the same (disregarding the financial side).
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