The Foreign Exchange (FOREX) Markets has grown to be the largest single market in the world, trading $2 trillion per day. The FOREX market also has its own uniqueness about it.
In the Foreign Exchange Market, there are 6 major currency pairs that are traded the most, accounting for 90% of the daily trading activity. They include:
1. EUR/USD = Euro vs. U.S. Dollar
2. JPY/USD = Japanese Yen vs U.S. Dollar
3. USD/CHF = U.S. Dollar vs Swiss Franc
4. AUD/USD = Australian Dollar vs U.S. Dollar
5. GBP/USD = British Pound vs U.S. Dollar
6. USD/CAD = U.S. Dollar vs Canadian Dollar
When reading the Forex quotes you have to look at the bid price (highest price willing to buy) vs the ask price (lowest price willing to sell). The currency that is located in the front of the pair (EUR/USD) is called the base currency and has the value of 1. If you see that the bid of the Euro vs U.S. Dollar is trading at 1.2811, that means that if you were to buy one Euro you are going pay $1.2811.
When the bid and ask prices are moving in an uptrend, it means that the secondary currency (EUR/USD) is getting weaker while the base currency (EUR/USD) is in turn getting stronger. Every pip it goes up the stronger the base currency is getting. The pip (price interest point) is almost identical to a tick in a stock price. The pip is the smallest increment; a move from $1.2811 to $1.2821 is a 10 pip move upwards.
When trading the pairs, you should think of the base currency as what we are 'buying' and 'selling.' If we were to buy (long) the EUR/USD, means that we bought (long) the euro, hoping it goes up, and selling (short) the dollar, hoping it will fall.
If we were to sell (short) the EUR/USD, means that we sold (short) the euro, hoping it fall and in turn buying (long) the dollar hoping it will rise.
When trading in the Foreign Exchange markets you trade in 'lots' compared to 'shares' when trading stocks. Lots are in increments of 10,000s:
1 lot=10,000 units
2 lot=20,000 units
3 lot=30,000 units
This means that the minimum you can purchase is 10,000 units of a certain currency pair (with some accounts lots can reach increments of 100,000). For example, if we were to buy 2 lots of the EUR/USD with the bid price at 1.2811, we would spend $25,622 (20,000 x 1.2811= 25,622) of our buying power. With buying 2 lots this means for every pip that it goes up (in your favor, if you sold short you want the base to fall) you make $2. Considering the movements of some of these pairs, it's possible to generate considerable profits. You can not forget the buying power offered by the currency brokerage firms, as high as 200:1. Turning a $1,000 into a buying power of $200,000, making it able to buy 10-15 lots at a time(the more lots bought or sold the more risk involved).
It's important to remember that high risks accompany any investment that offers the potential for great returns. Always way the advantages and disadvantages of any investment before putting your capital at risk. We advise anyone to become extremely familiar with the foreign exchange markets before trading in them.
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