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The Basics of Foreign Currency Lingo

Editorial Comment:  I frequently write about topics about which I assume the reader has a reasonable amount of knowledge however I do tend to leap ahead from time to time.  My recent forex trading articles definitely fall into that category.  I went looking for an article that I thought would cover the basics for me and found this one which covers at least some of the basic terminology of forex trading similar to what I talk about in my forex trading tutorial. You’ll note that when Harold starts talking about the spread and what you pay in terms of commissions to your broker you’ll see why I typically opt to trade binary options (which at my binary options broker are commission free).

Currency Trading Tutorial – Forex For Beginners
By Harold Hsu

What Is A Currency Pair?

A currency pair refers to the two currencies that are involved in a foreign exchange trade. For example, if you want to buy the Japanese Yen using U.S. Dollars, you would look at the quoted price for the USD/JPY currency pair (USD = U.S. Dollar; JPY = Japanese Yen).

Basically, the currency pair you should be looking at depends on the currencies you wish to trade in.

What Is A Base Currency?

A base currency is the currency that is first mentioned in a currency pair. In the USD/JPY currency pair for example, the base currency is the USD. In the EUR/USD currency pair (EUR = Euros), the base currency is EUR.

The base currency is the currency with which the quoted price refers to. For example, the quote USD/JPY 110.00 means that one unit of the base currency (i.e. USD) is worth 110.00 JPY.

To clarify, here’s another example: EUR/USD 1.4600.

This means that 1 unit of EUR is worth 1.4600 units of USD. To buy 1 EUR, you’ll need to trade in 1.4600 USD (i.e. sell 1.4600 USD).

What Are Bid And Ask Prices?

The base currency is traded at 2 different prices at any one time, depending on whether you want to buy or sell it. For example, if you want to sell the USD/JPY currency pair (i.e. sell the USD and buy JPY), you’ll receive 110.00 JPY. However, if you want to buy the USD/JPY pair, you may need to pay 110.03 JPY.

Notice how the buying price is higher than the selling price. This difference between the buy and sell price is known as the ‘spread’. If you first buy a currency pair and then immediately sell it, you’ll incur a loss equal to the spread.

The spread is what you pay to your broker as transaction fees.

To learn more, Click Here to download my free 26-page guide, Forex Trading Traps!

Harold Hsu is the owner of ForexSystemProfits.com where he provides premium Forex trading tips and resources.

Article Source: http://EzineArticles.com/?expert=Harold_Hsu http://EzineArticles.com/?Currency-Trading-Tutorial—Forex-For-Beginners&id=1067111

Ed (con’t): After reading this article by Harold I hope you have a better understanding of what I’ve been trying to teach you about making money trading foreign currency.  There is plenty of opportunity with the right software and broker.

Previous Post: Learning to Trade Foreign Currency Made All the Difference

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1 Comment updated July 26, 2013