Foreign Exchange

Buying and Selling

Tuesday, October 31, 2006 11:44 AM mistrack

In the forex market, currencies are always priced and traded in pairs. You
simultaneously buy one currency and sell another, but you can determine
which pair of currencies you wish to trade. For example, if you believe
the value of the euro is going to increase vis-á-vis the U.S. Dollar,
then you would go long on EUR/USD instrument (currency pair).
Obviously, the objective of forex currency trading is to exchange one
currency for another in the expectation that the market rate or price
will change so that the currency you bought has increased its value
relative to the one you sold. If you have bought a currency and the
price appreciates in value, then you must sell the currency back in
order to lock in the profit. An open trade or position is one in which
a trader has either bought / sold one currency pair and has not sold /
bought back the equivalent amount to effectively close the position.

Market Conventions
Market
conventions are rules and standards imposed by a governing body. In
case of decentralized forex market these conventions might differ due
to many national regulators (FSA, FSC, CFTC, NFA, BCSC, etc.). Since
there is no central governing body that sets forex market rules and
standards, we will reference only these that are universal.

Quoting Conventions
The
first currency in the pair is referred to as the base currency, and the
second currency is the counter or quote currency. The U.S Dollar is
usually the base currency for quotes, and includes USD/JPY, USD/CHF,
and USD/CAD. The exceptions are the Euro (EUR), Great Britain Pound
(GBP), and Australian Dollar (AUD). As with all financial products,
forex quotes include a "bid" and "ask", which is more often called
"offer" in the forex market. The bid is the price at which a forex
market maker is willing to buy (and you can sell) the base currency in
exchange for the counter currency. The offer is the price at which a
forex market maker will sell (and you can buy) the base currency in
exchange for the counter currency. The difference between the bid and
the offer price is referred to as the spread.

FOREX

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