Assets traded in Forex Trading and How to read Fx quotes


What is traded on the Foreign Exchange?
Forex trading is the simultaneous buying of one currency and the selling of another
or the buying and selling of money from one country against the money from
another country. Currencies are traded through a bank, a broker or a dealer, and
are traded in pairs; for example the Euro and the Us Dollar (EUR/UsD) or the Us
Dollar and the Japanese Yen (UsD/JPY).
Trading Forex can be confusing because you’re not buying anything physical. when
you are buying a currency, think of it as if you are buying a share in a particular
country. For example, when you buy US Dollar, you are in effect buying a share in
the Us economy, as the price of the currency is a direct reflection of what the market
thinks about the current and future health of the US economy. Thus, the exchange
rate of a given currency versus other currencies is the reflection of the overall
condition of that country’s economy, compared to other countries’ economies.
Currency prices are determined by a number of factors. Political stability, inflation,
and interest rates are all factored into the price of any currency, yet the most
important in determining a country’s currency price are economic and political
conditions in the issuing country. in some cases, governments may try to control
the price of their currency by buying extensively in order to raise the price or flooding
the market in order to lower the price. Nonetheless, it is impossible for one force
to control the market for any length of time due to the gigantic volume of the Forex
market, market forces will prevail in the long run, making currency the most open
and fair investment opportunities available.
Unlike other financial markets, the FX spot market has neither a physical location
nor a central exchange. (Except for a small portion of the world’s daily volume
which is traded on the Chicago Mercantile Exchange). The currency market is
considered an Over-the-Counter (OTC) or ‘interbank’ market, because the entire
market is run within a network of banks and brokers, continuously over a 24-hour
period. (OTC implies that you have to trade with a specific bank or broker when
you buy and sell a currency)

Currencies That Are Traded


The US Dollar is the most wildly traded currency globally, being on one side of about
90% of all transactions. The Euro’s share is second at about 35%, while only 3% of all
transactions in Forex market do not involve either the Euro or the US Dollar, underlining
the importance of the USD and EUR in the Forex market.


Symbol Country Currency Nickname


USD United States Dollar Buck
EUR Euro members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi

 

Currencies That Are Traded
The US Dollar is the most wildly traded currency globally, being on one side of about
90% of all transactions. The Euro’s share is second at about 35%, while only 3% of all
transactions in Forex market do not involve either the Euro or the US Dollar, underlining
the importance of the USD and EUR in the Forex market.


Symbol Country Currency Nickname


USD United States Dollar Buck
EUR Euro members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi

As a general rule, each currency has a three letters symbol, which is used in Forex
quotes. The first two letters identify the name of the country while the third letter
identifies the name of that country’s currency. For example: AUD (Australian dollars),
JPY (Japanese yen), CHF (swiss francs) and CAD (canadian dollars).
When trading currencies, the trade is always done in pairs and so when you buy one
currency, another currency is simultaneously being sold.
The most commonly traded currency pairs are
• Euro and US Dollar (EUR/USD)
• US Dollar and the Japanese Yen (USD/JPY)
• US Dollar and Swiss franc (USD/CHF)
• British Pound and US Dollar (GBP/USD)
The most commonly traded currency pairs are made from the most common and actively
traded currencies which are called the “Majors”.
The list of currencies below consists of the Majors
• USD (US dollars)
• EUR (European Euros)
• GBP (United Kingdom pounds)
• JPY (Japanese yen)
• AUD (Australian dollars)
• CHF (Swiss francs)
• CAD (Canadian dollars)
When quoting currency pairs, the first currency is referred to as the Base currency while
the second referred to as the Counter or Quote currency. The currency pair is used to
represent how much Quote currency is required to exchange for the base currency. In a
direct quote, the quote currency is the foreign currency.

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Example: EUR/USD 1.3500 mean that one Euro is traded for 1.35 USD.
As such the Base currency is always equal to 1 monetary unit of exchange.
The dominant base currencies are, in order of frequency, the EuR, GBP, and
USD. When a currency is quoted against the US Dollar it is called a direct
rate. Any currency pair that does not trade against the US Dollar is referred
to as a cross rate.
So what takes place once a trade is taking place?
Example: you buy British Pounds with the US Dollars – (GBP/USD),
anticipating, the Pound to increase in value relative to the Dollar. If the Pound
rises relative to the Dollar, you sell the position (you Sell British Pound) and
have made a profit.
Keep in mind that there are no standard cross-currency Quotes. Some have the base
currency on the top while others have it on the bottom. So how can you tell which is
which? You need to know at least one pair of currencies and which one of the pair is the
more valuable.
Dominant Base Currencies
• Euro – EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD
• British Pound – GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD
• US Dollar – USD/CAD, USD/JPY, USD/CHF

The Pip
The pip is the smallest unit of change in which a currency pair can move. In the Forex
world, currencies are traded in fractions of a Cent, or Euro, and so on. Nearly all currency
pairs consist of five significant digits and most pairs have the decimal point immediately
after the first digit, with four decimal points to follow. For example, EUR/ usd is equals
to 1.3377. In this example, a single pip equals the smallest change in the fourth decimal
place – that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip
always equal 1/100 of a cent. The only notable exception to this rule is the USD/JPY pair
where a pip equals $0.01.

A numeric example
You buy the EUR/USD, which is quoted with five digits in all out of which 4 decimals, at
1.3530 and sell it later at 1.3542. The difference would be +12 pips, or. 0012. However,
in the case of the uSD/JPY currency pair, one has to make a note that it is quoted with
only 2 decimals. And so if you bought the uSD/JPY at 110.51 and it then went down to
110.31 where you have sold it, the difference would be -20 pips, or. 20 pips loss. The pip
difference would determine your calculation of profit/loss on the trade.
As mentioned earlier, the quote currency is translated into a certain number of units of the
base currency. For example a quote of EuR/uSD at 1.35 means that, for every 1 euro, you
get 1.35 uS dollars. When the price of the quoted currency goes up, it indicates that the
base currency is becoming stronger and so one unit of the base currency will buy more
of the quote currency. on the other hand, if the price of the quote currency falls, the base
currency is becoming weaker.

The Bid and the Ask
Forex quotes are shown in ‘bid’ and ‘ask’ prices. the Bid is the price at which the market
maker is ready to buy a given currency pair and so at this price the trader (seller) can sell
the base currency to the market maker, The Bid is shown on the left side of the quotation.
On the other hand, the ask is the price at which the market maker is ready to sell a given
currency pair and so at this price the trader (buyer) can buy the base currency from the
market maker, The ask is shown on the right side of the quotation. The ask price is also
called the offer price.
Symbol Bid Ask
EUR/USD 1.3517 1.3520
Over the above Quote sample we can buy from the market maker one euro for 1.3520
american dollars, or sell one euro for 1.3517 american dollars to the market maker.

 

 

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