Currency Trading Overview
Buying and Selling:
Basic Rule: All trades result in the buying of one currency and the selling
of another, simultaneously.
The objective of currency trading is to exchange one currency for another with
the expectation that the market rate or price will change such that the currency
pair you have bought has appreciated in value relative to the currency you have
sold. If the currency you have bought appreciates in value and you close your
open position by selling this currency, or effectively buying the currency that
you originally sold, then you are locking in a profit. If the currency depreciates
in value and you close your open position by selling this currency, or effectively
buying the currency you have sold, then you are realizing a loss.
Buying a currency is synonymous with taking a long position in that currency.
Selling a currency is synonymous with shorting that currency.
An open trade or position is one in which a trader has either bought or sold
one currency pair and has not sold or bought back an adequate amount of that
currency pair to effectively close the trade. When a trader has an open trade
or position, he/she stands to profit or lose from fluctuations in the price
of that currency pair.
Rates and Spread:
A currency exchange rate is always quoted for a currency pair using International
Standards Organization (ISO) code abbreviations. For example, USD/JPY refers
to two currencies: the U.S. Dollar and the Japanese Yen. You can find the ISO code
for any currency from
BizFOREX's Currency Lookup.
BizFOREX's IFT platform is currently designed for the speculative
spot market - all transactions are roundtrip back to trader's home currency.
An exchange rate is simply the ratio of one currency valued against another.
The first currency is referred to as the base currency and the second as the
counter or quote currency. If buying, an exchange rate specifies how much you
have to pay in the counter or quote currency to obtain one unit of the base
currency. If selling, the exchange rate specifies how much you get in the counter
or quote currency when selling one unit of the base currency.
A currency exchange rate is typically given as a bid price and an ask price.
The bid price is always lower than the ask price. The bid price (the left side
of a price) represents what will be obtained in the quote currency when selling
one unit of the base currency. The ask price (the right side of the price) represents
what has to be paid in the quote currency to obtain one unit of the base currency.
The following USD/JPY price quote is an example of bid/ask notation.
118.48/58
The first component (before the slash) refers to the bid price (what you obtain
in JPY when you sell USD). In this example, the bid price is 118.48. The second
component (after the slash) is used to obtain the ask price (what you have to
pay in JPY if you buy USD). In this example, the ask price is 118.58.
The difference between the bid and the ask price is referred to as the spread.
In the example above, the spread is .10 or 10 pips. Unlike the USD/JPY, most
currency pair quotes are carried out to the 4th decimal place (i.e. EUR/USD
may be quoted at 0.9517/27), in which case 10 pips represents a difference of
.0005. Although a pip may seem small, a movement of one pip in either direction
can translate into thousands of dollars in gains or losses in the inter-bank
market.
Most currencies are traded directly against the US Dollar. The market rates
that are expressed for such currency pairs are called direct rates. In most
cases, the US Dollar is the base currency pair whereby the quote currency is
expressed as a certain number of units per 1 US Dollar. For example, the following
rate USD/CAD=1.4500 indicates that 1 USD (US Dollars)= 1.4500 CAD (Canadian
Dollars).
For some currency pairs, the US Dollar is not the base currency but the counter
or quote currency. The market rates that are expressed for such currency pairs
are called indirect rates. This is the case with GBP (British Pound or "Cable"),
NZD (New Zealand Dollar), EUR (Eurodollar), and AUD (Australian Dollar). For
example, the following rate GBP/USD=1.5800 indicates that 1 GBP (British Pound)=
1.5800 USD (US Dollars).
When one currency is traded against any currency other than the USD, the market
rate for this currency pair is called a cross rate. Cross rate is the
exchange rate between two currencies not involving the US Dollar. Although the
US dollar rates do not appear in the final cross rate, they are usually used
in the calculation and so must be known. Trading between two non-US Dollar currencies
usually occurs by first trading one against the US Dollar and then trading the
US Dollar against the second non-US Dollar currency. There are a few non-US
Dollar currencies that are traded directly, such as GBP/EUR or EUR/CHF.
The base currency for the following currency pairs is the Euro (EUR): EUR/GBP,
EUR/JPG, EUR/CHF, EUR/CAD. The base currency used when GBP is traded against the
JPY (Japanese Yen) is GBP, hence the quotation GBP/JPY.
Spot Deal / Market
A spot deal consists of a bilateral contract between a party delivering a specified
amount of a given currency to a counter party and receiving a specified amount
of another currency in return, based on an agreed upon exchange rate. Delivery
for spot deals occurs within two business days of the deal date, which is referred
to as the settlement date. (The settlement date for USD/CAD is one business
day after the deal date.)
Market Orders:
Market orders are orders that are executed immediately at the market rate.
Limit Orders:
Limit orders are orders that a trade should be executed (in the future) when
certain market conditions occur. There are three types of limit orders:
For New Positions:
For Current / Open Positions:
