15 LESSON OF FOREX

LESSON #3:
How Currencies Are Traded, Understanding FOREX Quotes, Market Structure and How to Love a *pip* -- soon to be your best friend!

Before I get into how currencies are traded, quoted and structured, let me tell you about one of the best advantages of FOREX Trading. The amount of money you need to place a trade (known as "margin") is all that can be lost!

I state it like this (in a glass-is-half-empty, negatively- presumptive kind of way) because, even though I know with proper self-taught education you're NOT going to lose as much as you win anyway, I want you to know that despite the super-high leverage associated with FOREX trading (400:1 is possible; meaning if you put up $1 the trading vendor will allow you to trade like you really have $400), it's still arguably less risky than futures (commodities) trading.

(And, forget stocks, you'll never get this type of LEVERAGE in the equities market)

Futures markets are often prone to sudden and dramatic moves, against which you can’t protect yourself, even by trading with protective stops. Your position may be liquidated at a loss, and you’ll be liable for any resulting deficit in the account. But because of the FX market’s deep liquidity and 24-hour, continuous trading, dangerous trading gaps and limit moves are eliminated. Orders are executed quickly, without slippage or partial fills. And finally, there are no margin calls -- for your protection, ALL our recommended brokers will automatically close out some or all of your open positions if your account equity falls below the level required to hold the positions. Think of this as a final, automatic stop, always working on your behalf to prevent a debit balance. In fact, if you pick from our list of recommended brokers, we guarantee that you’ll never lose more than you have in your FOREX account!

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Currencies are traded in dollar amounts called lots -- One lot is equal to $1,000, which controls $100,000 in currency. This is the "margin" I talked about above. Control $100,000 worth of currency for only 1,000 dollars. Good stuff, right?

Okay, let's move on....

Currencies are always traded in pairs in the FOREX. The pairs have a unique notation that expresses what currencies are being traded. The symbol for a currency pair will always be in the form ABC/DEF. ABC/DEF is not a real currency pair, it is an example of a symbol for a currency pair. In this example ABC is the symbol for one countries currency and DEF is the symbol for another countries currency.

Here are some of the common symbols used in the Forex:

USD - The US Dollar

EUR - The currency of the European Union "EURO"

GBP - The British Pound

JPY - The Japanese Yen

CHF - The Swiss Franc

AUD - The Australian Dollar

CAD - The Canadian Dollar

There are symbols for other currencies as well, but these are the most commonly traded ones.

A currency can never be traded by itself. So you can not ever trade a EUR by itself. You always need to compare one currency with another currency to make a trade possible.

Some of the common PAIRS are:

EUR/USD Euro / US Dollar "Euro"

USD/JPY US Dollar / Japanese Yen "Dollar Yen"

GBP/USD British Pound / US Dollar "Cable"

USD/CAD US Dollar / Canadian Dollar "Dollar Canada"

AUD/USD Australian Dollar/US Dollar "Aussie Dollar"

USD/CHF US Dollar / Swiss Franc "Swissy"

EUR/JPY Euro / Japanese Yen "Euro Yen"

The listed currency pairs above look like a fraction. The numerator (top of the fraction or "left" of the / however you want to SEE it) is called the base currency. The denominator (bottom of the fraction or "right" of the /however you want to SEE it) is called the counter currency. When you place an order to buy the EUR/USD, for instance, you are actually buying the EUR and selling the USD. If you were to sell the pair, you would be selling the EUR and buying the USD. So if you buy or sell a currency PAIR, you are buying/selling the base currency. You are always doing the opposite of what you did with to base currency with the counter currency.

If this seems confusing then you're in luck. You can always get by with just thinking of the entire pair as one item. Then you are just buying or selling that one item. Thinking like this will still enable you to place trades. You only need to be aware of the base/counter concept for Fundamental Analysis issues.

So why is it important to know about the base/counter currency now? The base/counter currency concept illustrates what is actually taking place in a Forex transaction. Some of you reading this, know that short-selling was restricted in the stock market (Short-selling is where you sell a stock/currency/option/commodity first and then try to buy it back at a lower price later). But in the FOREX you are always buying one currency (base) and selling another (counter). If you sell the pair you are simply flipping which one you buy and which one you sell. The transaction is essentially the same. This allows you to short-sell with no restrictions!

You want to be able to short-sell with no restrictions so you can make money when the market drops as well as when it rises. The problem with traditional stock market trading is that the market has to go up for you to make money. With FOREX trading you can make money in all directions.

Love Your *pips*
Currencies are traded on a price interest point (pip) system. Each currency pair has its own pip value.

Since we have a listed currency PAIR (i.e., EUR/USD, EUR/AUD), we need a way to talk about its associated number or price. When you see a FOREX price quote, you'll see something listed like this:

<<>>

The first component (before the slash) refers to the bid price (what you obtain in JPY when you sell USD). In this example, the bid price is 118.46. The second component (after the slash) is used to obtain the ask price (what you have to pay in JPY if you buy USD). In this example, the ask price is 118.51. The difference between the bid and the ask price is referred to as the spread (how brokers REALLY allow you to trade commission-free). In the example above, the spread is .05 or 5 pips.

Sometimes you won't see a two-sided quote, consisting of a 'bid' and 'offer'. But, rather, you'll see something like...

<<>>

When you see a Forex currency pair price quote, like the one above, just remember that that last digit of the price is referred to as the *pip*. So if you see a quote (123.50) and then a qu.ote in one min (123.51), the price rose 1 pip. Similarly, if you see a price quote of 187.50 and then after 5 min (187.58), the price rose 8 pips. The pip is always the last decimal place of the currency price quote.

YOUR GOAL IS TO CAPTURE AS MANY PROFITABLE pips AS POSSIBLE!

Since the US dollar is the centerpiece of the FOREX market, it is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair.

In the example above, a quote of USD/JPY 123.50 means that one U.S. dollar is equal to 123.50 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote above increases to 124.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

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So, now that you're fully indoctrinated into how to read currency quotes, let us remind you one on thing:

YOUR GOAL IS TO CAPTURE AS MANY PROFITABLE pips AS POSSIBLE!

Oh yeaaaaah ... that was already mentioned, wasn't it? :-)

The point: never lose sight of your objective. While the above lesson could go on and on for pages, it still wouldn't make you a world-class FOREX trader.

But, the combined power of our remaining lessons, just might.