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Forex Trading
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Currency
Pair Descriptions
In the forex market, currency trading is always done in currency pairs,
such as EUR/USD (or USD/JPY). Accordingly, all trades result in the simultaneous
buying of one currency and the selling of another. The base currency is
the "basis" for the buy or the sell. It is useful to consider
the currency pair as an instrument, which can be bought or sold.
Quoting
Conventions
The first currency in the pair is referred to as the base currency, and
the second currency is the counter or quote currency. The U.S Dollar,
as the world's dominant currency, is usually considered the base currency
for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. This means that
quotes are expressed as a unit of $1 USD per the other currency quoted
in the pair. The exceptions are the Euro, Great Britain pound, and Australian
dollar. These currencies are quoted as dollars per foreign currency. As
with all financial products, forex quotes include a "bid" and
"ask." The bid is the price at which a market maker (such as
Refco FX) is willing to buy (and you can sell) the base currency in exchange
for the counter currency. The ask is the price at which a market maker
will sell (and you can buy) the base currency in exchange for the counter
currency. The difference between the bid and the ask price is referred
to as the spread.
EUR/USD
If, for example, you think the US stock market will continue to fall and
that will hurt the USD, you click on BUY, you are buying Euros expecting
them to go up against the USD. If you click on Sell you buy US Dollars
expecting them to climb against the Euro.
USD/JPY
If, for example, you think that the Japanese government is going to weaken
the Yen in order to help their export industry, you would click on BUY,
expecting the US Dollar to increase in value against the Yen. If you think
that Japanese investors are pulling money out of US financial markets
and repatriating funds back to Japan you would click on SELL, expecting
the Yen to strengthen against the US Dollar as Japanese investors sell
their assets and convert their dollars to Yen.
GBP/USD
If, for example, you think the British Economy will continue to be the
leading economy amongst the G7 nations in terms of growth thus buoying
the Pound, you would click BUY, expecting the British Pound to strengthen
against the US Dollar. If you believe the British are about to commit
themselves to adopting the Euro, you would click SELL, expecting the Pound
to weaken against the Dollar as the British devalue their currency in
anticipation of merging with the Euro.
USD/CHF
If, for example, you think the Swiss Franc is overvalued and that the
US economy will recover quickly, you would click BUY, expecting the US
Dollar to strengthen against the Swiss Franc. If you believe that due
to instability in the middle east and in US Financial Markets the Dollar
will continue to weaken, you would click SELL, expecting the Swiss Franc
to strengthen against the Dollar.
EUR/CHF
If, for example, you think the Swiss government wishes to devalue the
currency to help exports in Europe, you would click BUY, expecting the
Euro to increase in value against the Swiss Franc. If inflation started
taking off in Germany and France, you would click SELL expecting the Swiss
Franc to increase in value against a devalued Euro.
AUD/USD
If, for example, you think that commodity prices are going to rise dramatically
thus benefiting the AUD, you would click BUY, expecting the Aussie to
strengthen against the US Dollar due to Australia being a leading exporter
of many commodities. If you believe that Australia is heading into recession,
you would click SELL, expecting the US Dollar to strengthen against the
AUD.
USD/CAD
If, for example, you think that the US economy is going to rebound while
the Canadian economy goes into recession, you would click BUY, expecting
the US Dollar to strengthen against the Canadian Dollar. If you believe
the Canadian Dollar is fundamentally undervalued and will strengthen against
the US Dollar, you would click SELL, expecting the CAD to rise against
the US Dollar.
NZD/USD
If, for example, you think the success of Lord of the Rings will cause
tourists to flock to New Zealand and pump money into the local economy,
you would click BUY, expecting the NZD to strengthen in value against
the US Dollar. If you expect the AUD is going to fall, along with commodity
prices, you would click SELL expecting the NZD to drop in value against
the US Dollar.
EUR/GBP
If, for example, you believe the British are about to commit themselves
to adopting the Euro, you would click BUY, expecting the Pound to weaken
against the Euro as the British devalue their currency in anticipation
of the merger. If you believe that Great Britain's economy will grow at
a faster rate than Europe's, you would click SELL, expecting the British
Pound to rise in value against the Euro.
EUR/JPY
If, for example, you believe that the Japanese banking crisis will continue
to get worse, you would click BUY expecting the Euro to rise against the
Yen. If, for example, you believe that Europe is going into recession
thus weakening the Euro, you would click SELL, expecting the Euro to drop
in value against the Yen.
GBP/JPY
If, for example, you believe that the BOE is going to raise interest rates,
you would click BUY, expecting the British Pound to increase against the
Yen due to interest rate arbitrage. If you think the Nikkei index will
rise at a higher rate than the FTSE thus buoying the Yen, you would click
on SELL, expecting the Yen to increase against the British Pound.
CHF/JPY
If, for example, you believe conflict in the Middle East may cause a spike
in oil prices, you would click BUY, expecting the CHF to increase against
the Yen due to Japan's reliance on imported oil and the CHF's safe haven
status. If you believe there will be more stability in the region, you
would click SELL, expecting the Yen to rise against the CHF.
GBP/CHF
If, for example, you believe that the BOE is going to raise interest rates,
you would click BUY, expecting the British Pound to increase against the
CHF due to interest rate arbitrage. If you believe the British are about
to commit themselves to adopting the Euro, you would click SELL, expecting
the Pound to weaken against the CHF as the British devalue their currency
in anticipation of merging with the Euro.
EUR/AUD
If you believe that Australia is heading into recession, you would click
BUY, expecting the Euro to strengthen against the AUD. If for you think
that commodity prices are going to rise dramatically, you would click
SELL, expecting the Aussie to strengthen against the Euro due to Australia
being a leading exporter of many commodities.
EUR/CAD
If, for example, you think that the German economy is going to rebound
while the Canadian economy goes into recession, you would click BUY, expecting
the Euro to strengthen against the Canadian Dollar. If you believe the
German economy will go into recession and drag the Euro down with it,
you would click SELL, expecting the Canadian Dollar to rise against the
Euro.
AUD/CAD
If, for example, you think that the Australian economy is going to grow
while the Canadian economy goes into recession, you would click BUY, expecting
the AUD to strengthen against the Canadian Dollar. If you believe the
Australian economy will go into recession, you would click SELL expecting
the Canadian Dollar to rise against the AUD.
AUD/JPY
If, for example, you think that the Australian economy is going to grow
while the Japanese economy goes into recession, you would click BUY, expecting
the AUD to strengthen against the Yen. If you believe the Australian economy
will go into recession due to falling commodity prices, you would click
SELL, expecting the Yen to rise against the AUD.
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