Foreign Exchange Trading

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Foreign Exchange Trading

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How Foreign Exchange Trade Works?

How a FX trade works, The concept of trading FX is simple, once it is realised that a currency is a commodity whose value fluctuates against another currency. By buying (or selling) a currency, FX Traders look to earn a profit from the movement in the FX rate. The beauty of FX is that the cost of trading is so low. This means that trades can be transacted for the extreme short-term, literally seconds, as well as for a longer duration.

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Foreign Exchange Trading Example

A trader believes the EUR is about to increase in value against the USD and buys €1 million at 1.5000. Shortly after, the rate is 1.5050 and the trader closes the position for a US $5,000.

€1,000,000 at 1.50 = US $1,500,000

€1,000,000 at 1.5050 = US $1,505,000

Difference = Profit of US $5,000

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Majors

There are around 170 currencies in the world. However, activity is concentrated into six ‘major' currency pairs, which account for around two-thirds of the total turnover.

The Majors are:

USD/EUR (27%)

USD/JPY  (13%)

GBP/USD (12%)

AUD/USD (6%)

USD/CHF (5%)

USD/CAD  (4%)

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Currency Pairings

In FX, one currency is always quoted against another. The ‘base' currency is the one that can be thought of as the reference. For instance, in a EUR/USD quote, EUR is the base currency and the quote defines how many USD it costs to buy. Similarly, in USD/JPY, USD is the base currency and the rate defines how many JPY it costs to buy.

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Bid and Offers (ASK)

The Bid is the price the market is willing to pay for a certain FX currency pair. The offer, or ask, is the price it is prepared to sell at.

For example, in a USD/CHF quote of 1.1650/1.653, the bid is 1.1650, while the offer is 1.1653. Frequently, quotes are abbreviated to just the ‘small numbers’. In this case, a phone quote would be 50/53.

The difference between the bid and the offer is known as the spread.

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PIPS

A “Pip” (price interest point) represents the smallest fluctuation in price of a currency pair. For most currencies, the rate is quoted to the fourth decimal place, with USD/JPY the notable exception.  A pip represents 1/10,000 th or 0.0001 of the counter currency. A change of 1 pip for GPB/USD at 1.6319 is 1.6320.  The Pip for USD/JPY is only quoted to the second decimal point (1/100th or 0.01).

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Profit and Loss Calculations

Most modern platforms automatically calculate a trader's profit and loss (P&L) on open positions. This allows traders to keep track as the market moves. Understanding how these calculations work is crucial for all traders.

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Profit & Loss Examples

Examples:

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Company Details

Foreign Exchange Trading

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