What You Need To Know About Currency Trading Basics PDF Print E-mail
Written by Fabian Lee   
Sunday, 09 May 2010 19:12
Currency trading holds the interests of traders and investors from all different walks of life. If you have ever wondered what it was and whether or not it might be something you might be interested, you should understand the currency trading basics a little bit before making that decision.
by FabianLee


Currency trading holds the interests of traders and investors from all different walks of life. If you have ever wondered what it was and whether or not it might be something you might be interested, you should understand the currency trading basics a little bit before making that decision.

Before you jump right into the middle of all of it you definitely will need to understand these basics or you might find yourself lost in a sea of confusion wondering what you just invested in.

What exactly is this type of trading? The item that is traded by stock traders and investors are pairs of currency. What this is; is the exchange rate between two different types of currency. Ones that you will see most often are EUR and USD which is the Euro and the U. S. Dollar, GBP and USD this is the English pound and U. S. Dollar, USD and CAD is the U. S. Dollar and Canadian dollar, USD and JPY is the Yen and U. S. Dollar, USD and CHF is the U. S. Dollar and Swiss franc and the AUD and USD is the Aussie and U. S. Dollar.

These pairs can actually make up to 85 percent of the overall action that is part of the Forex market. For example, if an investor or trader is said to go long or buys say the Euro, they are at the same time selling the U. S. Dollar. On the other hand if the trader or investor is going short then they are selling the Aussie and buying the U. S. Dollar at the same time as they sell the Aussie.

If you take a currency pair like the AUD and USD the first number listed will always be called the base currency and the second one or USD in this case would be called quote or counter currency. Each pair is listed in units and this means this is the counter that you need to get one unit of say the base currency. So if the pair AUD and USD is 1.6543 you would need 1.6543 in American dollars in order to earn one AUD.

The currency pairs are often quoted with the ask price and a bid. The bid of course is going to be lower than the ask price. The bid is what a broker is willing to buy at and the person who is the trader needs to sell it at this particular price. Now the ask price is the amount of money that the broker is willing to sell it at.

Another currency trade basics item to note is what they call a pip. This has to do with interest points. This is the minimum size move that any currency pair can actually make. For example a EUR and USD move could be 1.2100 to 1.2115 would be a total of 15 pips. And say a move with the USD and JPY from 112.05 to 113.05 would equal 100 pips.

You need to be aware of what is called a margin call. This is when a balance of a trade account falls below the actual maintenance margin. When a broker notices this, he or she will try to get rid your current trades by selling them if what you did were long trades. The broker will try to get back all of your trades if they were done as short trades. When this happens it usually means there was some kind of money mishandled or mismanaged.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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