Currency Pairs
The forex market companies such as Aussietrust trades variations in the exchange rate between the currency pairs, take for example the euro and the US dollar, which will be stated as Eur/Usd. While quoting the exchange rates, the first currency in the quotation is called the base currency and the second currency is called the quote currency.
The exchange rate for any currency pair will appear as a number for example 1.1235. If any pair Eur/Usd is quoted as 1.1235, that will mean that it takes $1.12 (and 35/100th) in US dollars to equal one euro.
Always remember the currencies that are most widely used worldwide are the ones that yield higher benefit because they are traded widely. Some of the examples of those are:- the US dollar (USD), the euro (EUR), the Japanese yen (JPY) and the British pound (GBP).
Learning Forex Trading – Pips
Normally, the tiniest variation in an exchange rate between two currencies is called a “pip”. With maximum currency pairs, which are quoted to four decimal places, a pip will equal 0.0001. The only exception is the Japanese yen currency pairs. These are only quoted to two decimal places so that a pip will equal 0.01. Many brokers now quote to five decimal places.
There are two things on which the value of a pip depends one is the currency pair being traded and the other the lot size that is traded.
Advantages of Forex Trading – Leverage
The forex trader has unparalleled leverage and this is what attracts everyone the most. The ability to hold a market position with just a fractional proportion of the market value of the instrument that is being traded is the actual definition of Leverage. This fraction of the required deposit amount that will hold a trading position is called “margin”.
Leverage is expressed as a ratio that expresses the amount of margin that is required by any broker to hold a position in the market. Let us suppose, 50:1 leverage will imply that a trader only needs to put up 2% of the trade’s complete value to initiate a trade. Some brokers even offer up to 1000:1 leverage.
Huge proportions of leverage mean that these forex traders utilize or can utilize a minor fraction of investment capital to achieve huge gains.
For example, with any investment of around $10, and trading micro-lots with 500:1 leverage, any trader can realize a profit of almost $20 on just a 20-pip difference in the exchange rate. Now we know that usually, many currency pairs are often having everyday-trading around 100 pips or more. It is quite easy to see the traders realizing significant gains from very small market activities, using the least amounts of trading capital, all thanks to leverage.
Nonetheless, traders have to keep in mind that just as leverage increases profits, it also increases losses. So remember that in the en, bout your experience in trading and risk-taking attitude. A blend of both will fetch you results here.