What is Currency Trading? (Part II)
The most active traded crosses focus on the three non USD currencies (EUR, JPY and GBP). These crosses are known as the euro crosses, yen crosses and the sterling crosses. The most actively traded cross currency pairs are: EUR/CHF, EUR/GBP, EUR/JPY, GBP/JPY, AUD/JPY and NZD/JPY. Crosses enable currency traders to directly target trades to specific individual currencies to take advantage of news or events.
You may notice that the currencies are combined in a seemingly strange way when you look up at the currency pairs. For instance, if sterling-yen (GBP/JPY) is a yen cross, why it is not being also referred to as yen-sterling (JPY/GBP)? The answer is that those quoting conventions were evolved over the years. These conventions have been designed to reflect traditionally strong currencies versus traditionally weak currencies with the strong currency coming first.
The first currency in the pair is known as the base currency. It is the base currency that you are buying or selling when you buy or sell a currency pair. The second currency in the pair is known as the counter currency. So if you buy 100,000 EUR/JPY. You have just bought 100,000 Euros and sold the equivalent amount in Japanese Yen.
Therefore you can say currency trading involves simultaneously buying and selling. Going long in currency trading means having bought a currency pair! When you are long, you are looking for the prices to go higher. You want to sell at a higher price from that where you bought. It will make you a profit. If you are long and the price goes down, you will make a capital loss.
Going short in currency trading means selling a currency pair! It means that you have sold the currency pair, meaning you have sold the base currency and bought the counter currency. In currency trading going short is as common as going long.
Its called squaring up if you have an open position and you want to close it. You need to buy or go long to square up if you are short. You need to sell or short to go flat if you are long. Having no position in the market is known as being square or flat. Selling high and buying low is the standard currency trading strategy just like in any other trading.
A clear understanding of how P&L works is especially critical to online margin trading. Profit and Loss is how traders measure success and failure. You will need to pony up cash as collateral to support the margin requirements established by your broker when you open an online currency trading account.
Profit and Loss (P&L) calculations are pretty straight forward. P&L calculations are based on position size and the number of pips you make or lose. Most of the currency pairs are quoted up to four decimal places except those involving JPY. Currency pairs involving JPY on one side are only quoted up to 2 decimal places. A pip is the smallest increment of price fluctuation in currency pairs. Suppose CHF/USD quote is 1.2233. It has gone up by 20 pips if the price moves from 1.2233 to 1.2253. Pip is the increase or decrease in the fourth decimal digit. Pips are also referred to as points. It is an abbreviation of Percentage in Points. - 23223
You may notice that the currencies are combined in a seemingly strange way when you look up at the currency pairs. For instance, if sterling-yen (GBP/JPY) is a yen cross, why it is not being also referred to as yen-sterling (JPY/GBP)? The answer is that those quoting conventions were evolved over the years. These conventions have been designed to reflect traditionally strong currencies versus traditionally weak currencies with the strong currency coming first.
The first currency in the pair is known as the base currency. It is the base currency that you are buying or selling when you buy or sell a currency pair. The second currency in the pair is known as the counter currency. So if you buy 100,000 EUR/JPY. You have just bought 100,000 Euros and sold the equivalent amount in Japanese Yen.
Therefore you can say currency trading involves simultaneously buying and selling. Going long in currency trading means having bought a currency pair! When you are long, you are looking for the prices to go higher. You want to sell at a higher price from that where you bought. It will make you a profit. If you are long and the price goes down, you will make a capital loss.
Going short in currency trading means selling a currency pair! It means that you have sold the currency pair, meaning you have sold the base currency and bought the counter currency. In currency trading going short is as common as going long.
Its called squaring up if you have an open position and you want to close it. You need to buy or go long to square up if you are short. You need to sell or short to go flat if you are long. Having no position in the market is known as being square or flat. Selling high and buying low is the standard currency trading strategy just like in any other trading.
A clear understanding of how P&L works is especially critical to online margin trading. Profit and Loss is how traders measure success and failure. You will need to pony up cash as collateral to support the margin requirements established by your broker when you open an online currency trading account.
Profit and Loss (P&L) calculations are pretty straight forward. P&L calculations are based on position size and the number of pips you make or lose. Most of the currency pairs are quoted up to four decimal places except those involving JPY. Currency pairs involving JPY on one side are only quoted up to 2 decimal places. A pip is the smallest increment of price fluctuation in currency pairs. Suppose CHF/USD quote is 1.2233. It has gone up by 20 pips if the price moves from 1.2233 to 1.2253. Pip is the increase or decrease in the fourth decimal digit. Pips are also referred to as points. It is an abbreviation of Percentage in Points. - 23223
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Learn Currency Trading. First Trade Your Forex Demo Account!
posted by X - Men @ 12:51 AM
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