This is the second chapter of the Beginner Course, we are going to talk about Currency Pairs.
In this chapter, you will learn about:
- What currency pair is
- Currency pair group
- Price movements
- Currency concepts
- Trading concepts
What is Currency Pair?
The quotation of 2 different currencies, with
the value of one being quoted against the
other. Currencies always trade in pairs and
traders buy the stronger currency and sell the
weaker currency.
Example
If Euro is gaining strength against the US dollar,
you buy the Euros and sell the US dollars at the
same time.
3 Currency Pair Groups
- Major Currency Pairs
- Exotic Currency Pairs
- Cross Currency Pairs
Major Currency Pairs
The major currency pairs that are
comprised of the most important
currency in the global markets—the
U.S. dollar (USD)—crossed with one of
seven other globally significant
currencies.
The most important currencies in the global economy.
Exotic Currency Pairs
The exotic currency pairs are the
currency pairs that are comprised of
the most important currency in the
global markets—the U.S. dollar
(USD)—crossed with any currency that
is not considered a major currency.
They are usually lightly traded and have
large bid/ask spreads.
The most important currency (USD) traded with the least traded currencies.
Cross Currency Pairs
Currency crosses are the currency pairs
that are comprised of any two
currencies—so long as neither of them
is not the U.S. dollar (USD).
Any pairs as long as neither of them is the USD
Price Movements
By determining what is going to
happen to a currency pair in the
future, investors can act today to
take advantage of the coming price
movements.
Price movement of Currency Pairs
can do one of the following three
things:
Base & Quote
The first currency listed in the currency pair is called the base currency and the second currency listed in the currency pair is called the quote currency.
Base & Quote Movements
If the base currency is
strengthening against
the quote currency,
the currency pair will
be moving up.
If the quote currency is
strengthening against
the base currency, the
currency pair will be
moving down.
If the base currency
and the quote currency
are equally strong, the
currency pair will be
moving sideways.
How to Trade
Make financial gain by trading currency pairs once your have decided which way the currency pair is going to move.
Buying a Currency Pair – Long Buy when the first
currency in the currency pair (the base currency) is
strengthening compared to the second currency in the currency pair (the quote currency).
Selling a Currency Pair – Short Sell when the
second currency in the currency pair (the quote
currency) is strengthening compared to the first
currency in the currency pair (the base currency).
Doing Nothing when the first currency in the
currency pair (the base currency) is not
strengthening or weakening compared to the
second currency in the currency pair (the quote
currency).
Trade Concepts
Before starting to trade, traders need to
understand the basic mechanics of currency
pair trading: Leverage, Margin & Spread.
Leverage
Leverage is the ability to convert a small
amount of power into a larger amount using
a tool. In this case you can use the tool of
financial leverage by borrowing money from
your broker.
For example, DCFX allows you to control
$20,000 with as little as $200 of your own
money. That means you only must pay for
0.01 percent of the position with your own
money. You effectively borrow the
remaining 99.99 percent of the purchase
price from your broker.
The leverage you enjoy in the Forex
market is determined by the margin you
are required to post for each trade.
Margin
Margin is the money that traders set aside
with broker for safekeeping to prove that
you are able to cover your losses.
For example, if you buy the EUR/USD, you
will be required to set aside 0.2 percent of
the position size as margin. That means if
the position size is 100,000 Euros, you will
be required to set aside the equivalent of
200 Euros to prove to your broker that you
can cover losses of at least 200 Euros should
your trade move against you. Different
currency pairs have different margin
requirements.
Spread
The spread is the distance between the
price at which you can buy a currency pair
and the price at which you can sell a
currency pair at any given moment.
Whenever you enter a trade, you start out
with a small loss because of the spread. You
must overcome the spread—hold onto the
trade long enough for it to move through
the spread—before you will be profitable on
your trade. It is a small hurdle to clear and a
small price to pay for the leverage and
liquidity that DCFX can provide in the Forex
market.
