THE COMPONENTS OF A FOREX DEAL 1
components:
- The currency pair
- The principal amount
- The rate
The forex deal is an obligation to buy and sell a specified amount of particular
pair of currencies at a predetermined exchange rate.
The Major Currencies
Here is a list of some of the most actively traded currencies, their currency
codes and nicknames. Please note that this is a partial list, as there are many
currencies traded in the world today:
EUR = euro “single currency”
GBP = Great Britain pound “cable” or “sterling”
USD = U.S. dollar “greenback” or “buck”
JPY = Japanese yen
CHF = Swiss franc “Swissy”
CAD = Canadian dollar “loonie”
AUD = Australian dollar “Aussie”
NZD = New Zealand dollar “kiwi”
Currency Pair
This is the term used to express one currency against another.
The price of a currency pair always expresses the amount of the 2nd named
currency needed to exchange against one unit of the first named currency.
Here are some of the most popular currency pairs:
EUR/USD Euro–U.S. dollar
USD/JPY U.S. dollar–Japanese yen
GBP/USD Great Britain pound–U.S. dollar
USD/CHF U.S. dollar–Swiss franc
AUD/USD Australian dollar–U.S. dollar
USD/CAD U.S. dollar–Canadian dollar
NZD/USD New Zealand dollar–U.S. dollar
EUR/JPY Euro–Japanese yen
EUR/GBP Euro–Great Britain pound
GBP/CHF Great Britain pound–Swiss Franc
EUR/AUD Euro–Australian dollar
The first member of every currency pair is called the “base” currency, and the
second member of each pair is known as the “quote” or “counter” currency.
For example, in the case of the euro/U.S. dollar currency pair (EUR/USD), the
euro is the base member of the pair, and the U.S. dollar is the counter member
of the pair.
In order to prevent confusion, the currencies in the EUR/USD pair should
always be presented in their correct order. You won’t see this pair represented
as USD/EUR, unless you are trading currency futures.
Who decides which currency is the base currency, and which is the counter or
quote currency? That task falls to the International Organization for
Standardization, or ISO. The ISO determines the currency codes and the order
of the currencies within each pair.
Whenever a currency pair is rising on a chart, this means that the base
currency is strengthening versus the counter currency. This is true for every
currency pair.
The opposite is also true—if the base currency is growing weaker versus the
counter currency, the chart will show the exchange rate of that currency pair
falling.
GBP/CHF Great Britain pound–Swiss Franc
EUR/AUD Euro–Australian dollar
The first member of every currency pair is called the “base” currency, and the
second member of each pair is known as the “quote” or “counter” currency.
For example, in the case of the euro/U.S. dollar currency pair (EUR/USD), the
euro is the base member of the pair, and the U.S. dollar is the counter member
of the pair.
In order to prevent confusion, the currencies in the EUR/USD pair should
always be presented in their correct order. You won’t see this pair represented
as USD/EUR, unless you are trading currency futures.
Who decides which currency is the base currency, and which is the counter or
quote currency? That task falls to the International Organization for
Standardization, or ISO. The ISO determines the currency codes and the order
of the currencies within each pair.
Whenever a currency pair is rising on a chart, this means that the base
currency is strengthening versus the counter currency. This is true for every
currency pair.
The opposite is also true—if the base currency is growing weaker versus the
counter currency, the chart will show the exchange rate of that currency pair
falling.
Exchange Rate
Currencies are traded in pairs and exchanged one against the other when
traded; the price at which they are exchanged is called the exchange rate. The
exchange rate tells a buyer how much of the quote or counter currency is paid
to obtain one unit of the base currency. The exchange rate also tells a seller
how much of the quote or counter is received when selling one unit of the base
currency. For e.g. an exchange rate for GBP/USD 1.6503 specifies to the buyers
of British pound that 1.6503 US dollars must be paid to obtain 1 British pound.
Forex Quote
This is the price of a currency showing the currency pair, Bid and Ask or Buy
and sell price. A currency quote is displayed as this;
GBP/USD 1.6345/16349
PIP
Pip simply stands for “Price Interest Point". The word ‘pip’ is used to describe a
price difference. 1 pip is the smallest possible price change; it is an increase or
decrease of 1 unit of the last decimal shown in a price. 1 pip can be expressed
as 0.0001 in the case of currency pairs quoted to the 4th decimal or 0.01 if the
price quotation ends at the 2nd decimal such as USD/JPY or XAU/USD
Value of a Pip: The value of one pip will depend on the currency pair and trade
amount. Its value always occurs in the counter currency; in CHF for USD/CHF orXAU/CHF and in USD in the case of EUR/USD or AUD/USD. The pips value for
each particular case is now simply calculated using the face amount:
Example: 4.5 lots EUR/USD: 450’000 * 0.0001 = 45USD
Spread
This is the difference between the Buy and Sell, or Bid and Ask. In other words
this is the difference between the market makers selling price to its clients and
the price at which the market maker buys it from its clients.
Margin
This is the minimum balance required to execute a trade. It is the minimum
security in forex markets deposited to a traders account that is intended to
cover any currency trading losses in the future.
Leverage
Leverage is the ability to control a large amount of capital with a
comparatively small amount of capital.
For example, one lot of a currency pair has a value of 100,000 units of
currency—100,000 euros or 100,000 U.S. dollars, and so on. Do we actually
need to possess 100,000 euros or 100,000 U.S. dollars in order to trade one lot
of the EUR/USD currency pair?
No, we can control one lot with as little as 1/200th of that amount. We could
say that a person who controls one lot in this fashion is using 200-to-1 leverage.
The amount of leverage used by traders varies based on their individual needs
and their “comfort zone.
Long and Short. Are expressions used to describe the direction of a trade.
After taking the offer, the speculator is buying a currency pair and will be
considered to be long. By selling USDJPY on the bid, he is effectively short.
MARKET ORDER
An order to buy or sell which is to be done at the price immediately available;
the current rate at which the market is dealing. For example current rate is
EUR/USD 1.3456/1.3457 and you want to buy at 1.3457.
Take Profit or Limit Order
This is an instruction to deal if a market moves to a more favorable level. For
example (i.e. an instruction to buy if the market goes down to a specific level
or sell if the market goes up to a specific level). The limit order is often used
to take profit on an existing position and can also be used to establish new
positions. For example, EUR/USD is trading at 1.2713/16. You believe the euro
is going to strengthen but will fall back to 1.2700 before it goes higher. You
place a limit order at 1.2700, your limit order is executed when price gets to
1.2700.
Currencies are traded in pairs and exchanged one against the other when
traded; the price at which they are exchanged is called the exchange rate. The
exchange rate tells a buyer how much of the quote or counter currency is paid
to obtain one unit of the base currency. The exchange rate also tells a seller
how much of the quote or counter is received when selling one unit of the base
currency. For e.g. an exchange rate for GBP/USD 1.6503 specifies to the buyers
of British pound that 1.6503 US dollars must be paid to obtain 1 British pound.
Forex Quote
This is the price of a currency showing the currency pair, Bid and Ask or Buy
and sell price. A currency quote is displayed as this;
GBP/USD 1.6345/16349
PIP
Pip simply stands for “Price Interest Point". The word ‘pip’ is used to describe a
price difference. 1 pip is the smallest possible price change; it is an increase or
decrease of 1 unit of the last decimal shown in a price. 1 pip can be expressed
as 0.0001 in the case of currency pairs quoted to the 4th decimal or 0.01 if the
price quotation ends at the 2nd decimal such as USD/JPY or XAU/USD
Value of a Pip: The value of one pip will depend on the currency pair and trade
amount. Its value always occurs in the counter currency; in CHF for USD/CHF orXAU/CHF and in USD in the case of EUR/USD or AUD/USD. The pips value for
each particular case is now simply calculated using the face amount:
Example: 4.5 lots EUR/USD: 450’000 * 0.0001 = 45USD
Spread
This is the difference between the Buy and Sell, or Bid and Ask. In other words
this is the difference between the market makers selling price to its clients and
the price at which the market maker buys it from its clients.
Margin
This is the minimum balance required to execute a trade. It is the minimum
security in forex markets deposited to a traders account that is intended to
cover any currency trading losses in the future.
Leverage
Leverage is the ability to control a large amount of capital with a
comparatively small amount of capital.
For example, one lot of a currency pair has a value of 100,000 units of
currency—100,000 euros or 100,000 U.S. dollars, and so on. Do we actually
need to possess 100,000 euros or 100,000 U.S. dollars in order to trade one lot
of the EUR/USD currency pair?
No, we can control one lot with as little as 1/200th of that amount. We could
say that a person who controls one lot in this fashion is using 200-to-1 leverage.
The amount of leverage used by traders varies based on their individual needs
and their “comfort zone.
Long and Short. Are expressions used to describe the direction of a trade.
After taking the offer, the speculator is buying a currency pair and will be
considered to be long. By selling USDJPY on the bid, he is effectively short.
MARKET ORDER
An order to buy or sell which is to be done at the price immediately available;
the current rate at which the market is dealing. For example current rate is
EUR/USD 1.3456/1.3457 and you want to buy at 1.3457.
Take Profit or Limit Order
This is an instruction to deal if a market moves to a more favorable level. For
example (i.e. an instruction to buy if the market goes down to a specific level
or sell if the market goes up to a specific level). The limit order is often used
to take profit on an existing position and can also be used to establish new
positions. For example, EUR/USD is trading at 1.2713/16. You believe the euro
is going to strengthen but will fall back to 1.2700 before it goes higher. You
place a limit order at 1.2700, your limit order is executed when price gets to
1.2700.
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