- Forex trading uses currency as the trading vehicle. Forex is short for foreign exchange, also known as FX and currency trading. It is an investment market, where you trade money, known as currency, where you do not trade USD for USD, but USD for Euros, Yen, Australian dollars, and numerous other currencies used in countries around the world.
- You make money trading in the forex market by determining which currency in a pair will move up or down in value faster or in the opposite direction from the other currency in the pair.
- EUR/USD is the euro and US dollar currency pair. The EUR is called the base currency, and it is always equal to 1. The USD is the quote currency and it will change in value against the EUR. If you see 1 EUR/USD= 1.11967, it is read as for 1 euro you will receive 1.11967 US dollars in an over the counter trade.
- If you walked into a bank and asked for 100 euros to be exchanged into USD, you would be given $111.99 dollars. If you walked into that same bank and said you need to exchange $100 USD for euros, you would be given 89.29 euros based on the exchange rate mentioned above.
-This type of currency exchange is common and what travelers do each year, but it is not how investors make money in forex trading. The money is actually made based on the bid and ask price or the buy and sell price of a currency pair, and whether the currency pair is going to gain or lose in value.
- The chart shows you the most typical way information is presented. You will see what currency pair the quote information is about and the time the quote is being provided. There are also boxes that show the low and high for the day, before giving you the sell and buy or ask and bid price for the currency.
- Some charts just offer the currency pair and the bid/ask price. It is your job as a trader to determine if you want to sell euros and buy USD because the USD will become stronger or if you want to buy euro and sell USD because the USD will become weaker, against the EUR.
-The point that many traders become confused on is what strong or weak means in a currency pair. The easiest way to define this is to look at how far your base currency goes in an exchange.
-In the EUR/USD pair, you can use fewer EUR to gain more USD. However, you need more USD to gain fewer euros. Now, let’s look at the exchange above again. You gained 111.99 USD for 100 euros, but only 89.29 euros for 100 USD.
-So, let’s now answer the question of what has more value. You traded less euros to get more USD. You traded more USD to get fewer euros. In this equation your euros hold more value against the USD because the euro goes further when traded in for USD. When you travel, you want your domestic currency to hold more value, so you spend less of it. When you come back from your travels, you want your international currency to provide you with more of your domestic currency.
-If you think in those terms, then it will be easier to understand why value is so important to the forex market and retail traders. You are considered a retail trader, but you are also not the only player in the market.
- You can also remember these little hints:
1. The base currency is stronger than the quote currency equals a rising currency pair. (The price will be rising on a chart)
2. The base currency is weaker than the quote currency equals a falling currency pair. (The price will be falling on a chart)
3. The quote currency is weaker than the base currency equals a rising currency pair. (The price will be in an upward trend on the chart)
4. The quote currency is stronger than the base currency equals a falling currency pair. (The price will be in a downward trend on the chart)
- You make money trading in the forex market by determining which currency in a pair will move up or down in value faster or in the opposite direction from the other currency in the pair.
- EUR/USD is the euro and US dollar currency pair. The EUR is called the base currency, and it is always equal to 1. The USD is the quote currency and it will change in value against the EUR. If you see 1 EUR/USD= 1.11967, it is read as for 1 euro you will receive 1.11967 US dollars in an over the counter trade.
- If you walked into a bank and asked for 100 euros to be exchanged into USD, you would be given $111.99 dollars. If you walked into that same bank and said you need to exchange $100 USD for euros, you would be given 89.29 euros based on the exchange rate mentioned above.
-This type of currency exchange is common and what travelers do each year, but it is not how investors make money in forex trading. The money is actually made based on the bid and ask price or the buy and sell price of a currency pair, and whether the currency pair is going to gain or lose in value.
- The chart shows you the most typical way information is presented. You will see what currency pair the quote information is about and the time the quote is being provided. There are also boxes that show the low and high for the day, before giving you the sell and buy or ask and bid price for the currency.
- Some charts just offer the currency pair and the bid/ask price. It is your job as a trader to determine if you want to sell euros and buy USD because the USD will become stronger or if you want to buy euro and sell USD because the USD will become weaker, against the EUR.
-The point that many traders become confused on is what strong or weak means in a currency pair. The easiest way to define this is to look at how far your base currency goes in an exchange.
-In the EUR/USD pair, you can use fewer EUR to gain more USD. However, you need more USD to gain fewer euros. Now, let’s look at the exchange above again. You gained 111.99 USD for 100 euros, but only 89.29 euros for 100 USD.
-So, let’s now answer the question of what has more value. You traded less euros to get more USD. You traded more USD to get fewer euros. In this equation your euros hold more value against the USD because the euro goes further when traded in for USD. When you travel, you want your domestic currency to hold more value, so you spend less of it. When you come back from your travels, you want your international currency to provide you with more of your domestic currency.
-If you think in those terms, then it will be easier to understand why value is so important to the forex market and retail traders. You are considered a retail trader, but you are also not the only player in the market.
- You can also remember these little hints:
1. The base currency is stronger than the quote currency equals a rising currency pair. (The price will be rising on a chart)
2. The base currency is weaker than the quote currency equals a falling currency pair. (The price will be falling on a chart)
3. The quote currency is weaker than the base currency equals a rising currency pair. (The price will be in an upward trend on the chart)
4. The quote currency is stronger than the base currency equals a falling currency pair. (The price will be in a downward trend on the chart)
