Foreign Exchange market otherwise known as forex or FX is the biggest market in the financial world. It involves buying and selling of currencies, 24 hours a day 5 days a week, worldwide.
Of all the markets available in the financial world, forex is the most liquid. Liquidity refers to the level of market transaction express in monetary value. It is estimated that forex trading averages $3Trillion a day. Roughly 10% are done through the commercial and financial transaction, while 90% accounts for speculative placements.
Speculative is where we will center our discussion. It means buying and selling currencies for a short term gains based on daily postings of prices. To add, quotes of currencies are influence not only by the law of supply and demand, but by the fundamentals and technical aspects.
Price fluctuations are evident when economic data reports are issued out. This is an example of a fundamental influence. Fundamentals are information that pertains to the macroeconomic and political events where the currency is traded.
Examples of these are the economic data reports such as inflation rate, gross domestic product report, interest rate, and balance of trade among others. Monetary policy, international trade inflows are also determining factors. We must not discount prices of gold and oil plays at the market too.
The other term that influence price movement is called the technical aspect. It refers to the use of technical analysis of price movement and behavior. Using tools such as charts, trending analysis, and the use of mathematical approach such as relative strength index(RSI), and moving average are just a few of them.
Unlike commodities and stock trading where only one unit is transacted at a time, currency trading is mandated to be done on simultaneous buy and sell. Take note, I said buy and sell, you have to do both. This is called currency pair. When you buy one currency you have to sell another currency.
For example, we speculate that United States is bottoming out of its financial crisis so naturally we expect the Dollar to have an upward bias. So we will buy the green buck, but we have to sell another currency in order to have a simultaneous transaction, for it is mandated to have a currency pair. We pick the Japanese Yen as the sell currency to complete the transaction, and the price is at 95.5222. Our post will look like this USD/JPY 95.5222
The figure above shows how much the Japanese Yen was worth when we both the green buck, 95.5222. With the symbol USD/JYP, the first currency is called the base currency. Tradition has it that the base currency is the stronger of the two, regardless if it is a buy or sell quote. While the second currency is your counter currency, this determines the price fluctuation and your profit and loss. It is the one reflected on the quote.
If you take a look at the last two digits after the decimal of our quote, those two digits are called pips. Pips are use to calculate your profit and loss. This is done by getting the difference from your buy quote from your sell quote. Let’s say, we sold your green buck at 95.5296, there will be a difference of .0074, from there we multiply that with your position of say, $2,000. The result will be a $14.80 profit.
You can also have it the other way around, wherein if you think the US green buck will continue its downward bias, all you have to do is sell the Dollar and buy the counter currency, in which case the Japanese Yen. From there our profit and loss will be (-$14.80)
Just bear in mind, keep abreast with the fundamental issues, it will help you in the choice of currencies you are to buy and sell. Also, keep referring to technical analysis.
Well, happy trading!
trading
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