Base and Quote Currencies

As you know, currencies are traded in pairs - one is sold and one is bought. When written, it is usually in the form EUR/USD or just EURUSD. There are two currencies in each pair. The "top" one, the Euro in this example, is called the base currency. The "bottom", or second one, is called the quote currency.

What such pair represents is how much of the quote currency you need to buy one unit of the base currency. It also means how mcuh of the quote currency you can buy with one unit of the base currency. For example, right now the USD/JPY rate is 105.49. That means you need 105.49 Japenese Yens (quote currency) to buy one US dollar (base currency) with your forex broker's trading system.

The use of base and quote currency becomes important when talking about a currency becoming stronger or weaker. If a currency is the base currency and it becomes stronger against the quote currency, the exchange rate of the pair goes up. If the quote currency becomes stronger, the exchange rate goes down. This is only terminology, but it's important to understand.

Good luck with your trades,
Nadav

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The Stop Loss Order

When you trade the forex market, your trade can go very well - you can make 100% in minutes and enjoy a daily income of thousands. However, just as trades can go well, they can go terribly wrong, and you can lose your entire trade in minutes.

Exactly for that the stop-loss order was created. Every forex broker lets you use it. It allows you to specify a price in which the position will be terminated. If you are on a "long" position (buying), the position will be sold. If you did short selling, your position will be bought back.

The big benefit of a stop loss order is clear. It allows you to set the maximum amount you're willing to lose. This is the heart of every forex trading system. Without a good stop loss, you're going to lose very fast.

However, a stop loss order can be a two-edged sword. Sometimes the exchange rate can just "touch" the stop loss point and then rush towards your original goal. This situation is very frustrating, and it causes loss of faith in the system. However, if the system is good, most stop loss orders are good.

Good luck with your trades and stop loss orders,
Nadav

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Forex Trader? You Need Nerves of Steel

When you trade the forex market, you will reach a point of impatience. "I can do better than the system", or the infamous "I'm smarter than the market". When you start saying that, close all the trades that need to be closed and shut down the trading software. You've gone too far.

Forex trading may sound easy, and it really is. But it's easy under one condition: discipline and nerves of steel. Sometimes your forex trading system will say something completely different than what you think. If you trust this system and it's good, just do what it says. Most of the times, you will profit.

Not only discipline and listening to the system are required. You also need nerves of steel. Sometimes you see your position going down 3%, and with leverage this can also mean 30%. The most important thing to do is not panic. Re-evaluate the situation. Does the trade entry point matches the system's orders? Does this situation require exiting, or the trade has not reached an exit point yet? First think, then act. If you act before you think, your money will disappear very quickly.

That is why you need to practice demo accounts first. Every good forex broker will let you open a demo account and practice your skills. Make sure you can stick to a system on virtual money. When you succeed there, move to real money.

Good luck,
Nadav

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Short Selling

Sometimes you want to enter a trade, but you don't have the right currencies. For example, your accound is funded with US dollars, and you think the dollar is going to rise over the Euro, so you want to "sell" the EUR/USD pair, meaning selling Euros and buying dollars. However, you don't have Euros to sell.

To get over this problem, your forex broker allows you to do "short selling". This means you sell something you don't have, and you agree to buy it later. This enables you to profit when something is going down. You sell it now, at a high price, and buy it when the price is lower. "Buy low, sell high". You do exactly that, but in reverse.

This order is common also on the stock market, so people can profit from a down market. However, it is not always available, and the risks are much greater (in theory, there is an unlimited loss). Also, if the price suddenly goes up, you may not be able to buy back the stock, and you'll be left with a huge loss.

Most good forex systems "know" that short selling is possible. This way you can benefit both ways - when a currency goes up, and when it goes back down.

Hope you learned something new today.
Nadav

nadavs

Pips - Forex Units

The last post was about the spread, which is measured in units called pips. A pip is the smallest unit of change in forex rates. It also appears on the stock market. The smallest unit of change there is one cent, so a pip on the stock market is one cent. Most forex trading systems and stock market auto-traders use pips, so it's a term you should know.

In the forex market, exchange rates usually go four decimal points. For example, the GBP/USD rate right now 1.9760, which means that for every British Pound you sell, you can buy 1.9760 US dollars. The zero is the ten thousandth digit, so that is what forex pips are in this pair. If the rate goes up to 1.9763, it is said that the exchange rate moved up 3 pips.

However, not all pips are the ten thousandth digit. Some currencies, like the Japanese Yen, go in hundreds. Currently, the exchange rate of the USD/JPY pair is 103.94. This means that for every US dollar you sell, you can buy 103.94 Japanese Yens. As you can see, the exchange rate of USD/JPY goes up to two decimal digits. A pip in this pair is one hundreth of the rate. If the exchange rate goes up to 104.00, it is said the rate went up 6 pips.

This is the reason the spread is important. The bigger the spread, the bigger losing position you start with. Your objective is to get the lowest spread possible to have the best opening position when entering a trade.

Good luck with your trades,
Nadav

nadavs

Forex Spreads

When you start trading in the forex market, you will probably hear the term "spread". If you are a beginner, you probably don't know what it means, or why you want this spread to be as small as possible. Here is the truth:

A spread is the difference between the buying and selling price of a currency pair at a given time. Usually your broker gives you two rates: a buying rate and a selling rate. The buying rate is always higher than the selling rate, so if you buy and sell without price movement, you lose.

Good forex brokers will give you a spread of 3 pips or less for the major currencies (a pip is a "forex unit" of the exchange rate, usually a ten thousandth of the rate) during normal market conditions. When the market becomes volatile (which happens after important announcements, like interest rate decisions) the spread usually grows. Bad forex brokers give spreads of 5 pips or more on major currencies.

The spread is just another form of commission. Most brokers don't take a commission on trades (if your broker does, consider switching), but they have this spread. It means you start from a losing position right after you enter a trade, and you need the exchange rate to move some pips in your direction just to break even.

This is the reason the spread is low on the major currencies and high on others. The major currencies have a high trading volume, so many people are buying and selling on the same price, and the broker profits from the spread. The more exotic currencies have a lower volume, so the brokers raise the spreads to make more money out of them.

Remember - the spread is a hidden commission. Don't compromise for a spread of more than 3 pips on the major currencies under normal market conditions.

Yours,
Nadav

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The Traders on the Forex Market

When you trade in the forex market, you are not alone. The daily volume of the forex market is over $3 trillion, which means a trade of one million dollars doesn't even touch the tip of top traders. It's a really huge market. But who is trading there?

First there are banks, including central banks and commercial banks. Central banks have some control over the economy of a country, especially with the ability to change interest rates. Central banks also control money reserves of countries, including reserves of foreign currencies.

Commercial banks manage the trades between other traders. They also buy and sell currencies for their own speculation and profit attempts. Those commercial banks are also forex brokers for some institutions and private traders.

Importers and exporters also trade the forex market, mainly to convert foreign currencies to their local currencies and "lock" their profit with contracts that guarantee exchange rates when they do international business.

Finally, there are private speculators. These can be private people, hedge funds, or any person or organization that does not have to report every move in the forex market to the authorities. Those speculators try to buy and sell currency pairs in order to make a profit. They usually have no intention to use foreign currencies for anything else.

Hope you learned something today.
Yours,
Nadav

nadavs

What the Forex Market is All About

Yesterday I briefly introduced the forex market. Today I want to go a little bit more in detail.

As you know, the forex market is where currencies are being bought and sold via a forex broker. After you sign up with a forex broker you make a deposit and you can start trading.

Forex trading is about selling one currency and buying another one. This is why forex price quotes go in pairs. For example, EUR/USD means how many US dollars are worth one Euro. When you use the "buy" command on this pair, you sell US dollars and buy Euros. Your main objective here is that the price of the Euro will rise in terms of US dollars, so you will make a profit.

After you achieved (or not achieved) your price objectives, you can "sell" the EUR/USD pair: you sell your Euros and get them in US dollars. If the price of the Euro increased, you get more US dollars. A profit!

Now that you understand how this works, sign up with a forex broker, ask the broker to open a demo account for you, and start demo trading. Don't put money right on the start. Get the feeling of the market first.

Enjoy,
Nadav

nadavs

So, What is Forex?

Welcome to my new forex blog!

I will be giving here short posts about the world of forex. It'll be mainly about the important parts of forex, like spreads, buying, selling, short selling, options, and so on. Forex is a big subject, and I'll give it to you in small bits, for an easier understanding.

Today I will start with the most important thing: what is forex?

Forex is a short way to write Foreign Exchange, or foreign currency exchange. The forex market is where currencies are being bought and sold for other currencies, mostly to make a profit.

I hope you will enjoy and learn from this new blog.
Yours,
Nadav

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