|
The
first
currency
in
the
exchange
pair
is
referred
to
as
the
base
currency
and
the
second
currency
as
the
counter
term
or
quote
currency.
The
counter
term
or
quote
currency
is
thus
the
numerator
in
the
ratio,
and
the
base
currency
is
the
denominator.
The
value
of
the
base
currency
(denominator)
is
always
1.
Therefore,
the
exchange
rate
tells
a
buyer
how
much
of
the
counter
term
or
quote
currency
must
be
paid
to
obtain
one
unit
of
the
base
currency.
The
exchange
rate
also
tells
a
seller
how
much
is
received
in
the
counter
term
or
quote
currency
when
selling
one
unit
of
the
base
currency.
For
example,
an
exchange
rate
for
EUR/USD
of
1.2083
specifies
to
the
buyer
of
euros
that
1.2083
USD
must
be
paid
to
obtain
1
euro.
At
any
given
point,
time
and
place,
if
an
investor
buys
any
currency
and
immediately
sells
it -
and
no
change
in
the
exchange
rate
has
occurred
-
the
investor
will
lose
money.
The
reason
for
this
is
that
the
bid
price,
which
represents
how
much
will
be
received
in
the
counter
or
quote
currency
when
selling
one
unit
of
the
base
currency,
is
always
lower
than
the
ask
price,
which
represents
how
much
must
be
paid
in
the
counter
or
quote
currency
when
buying
one
unit
of
the
base
currency.
For
instance,
the
EUR/USD
bid/ask
currency
rates
at
your
bank
may
be
1.2015/1.3015,
representing
a
spread
of
1000
pips
(also
called
points,
one
pip
=
0.0001),
which
is
very
high
in
comparison
to
the
bid/ask
currency
rates
that
online
Forex
investors
commonly
encounter,
such
as
1.2015/1.2020,
with
a
spread
of 5
pips.
In
general,
smaller
spreads
are
better
for
Forex
investors
since
even
they
require
a
smaller
movement
in
exchange
rates
in
order
to
profit
from
a
trade.
Margin
Banks
and/or
online
trading
providers
need
collateral
to
ensure
that
the
investor
can
pay
in
case
of a
loss.
The
collateral
is
called
the
margin
and
is
also
known
as
minimum
security
in
Forex
markets.
In
practice,
it
is a
deposit
to
the
trader's
account
that
is
intended
to
cover
any
currency
trading
losses
in
the
future.
Margin
enables
private
investors
to
trade
in
markets
that
have
high
minimum
units
of
trading
by
allowing
traders
to
hold
a
much
larger
position
than
their
account
value.
Margin
trading
also
enhances
the
rate
of
profit,
but
can
also
enhance
the
rate
of
loss
if
the
investor
makes
the
wrong
decision.
Leveraged
financing
Leveraged
financing,
i.e.,
the
use
of
credit,
such
as a
trade
purchased
on a
margin,
is
very
common
in
Forex.
The
loan/leveraged
in
the
margined
account
is
collateralized
by
your
initial
deposit.
This
may
result
in
being
able
to
control
USD
100,000
for
as
little
as
USD
1,000.
There
are
three
ways
private
investors
can
trade
in
Forex
directly
or
indirectly:
- The spot market
- Forwards and futures
- Options
A
spot
transaction
A
spot
transaction
is a
straightforward
exchange
of
one
currency
for
another.
The
spot
rate
is
the
current
market
price,
also
called
the
benchmark
price.
Spot
transactions
do
not
require
immediate
settlement,
or
payment
"on
the
spot."
The
settlement
date,
or
"value
date,"
is
the
second
business
day
after
the
"deal
date"
(or
"trade
date")
on
which
the
transaction
is
agreed
to
by
the
two
traders.
The
two-day
period
provides
time
to
confirm
the
agreement
and
arrange
the
clearing
and
necessary
debiting
and
crediting
of
bank
accounts
in
various
international
locations.
Forwards
and
Futures
Forwards
make
up
about
46%
of
currency
trading.
A
forward
transaction
is
an
agreement
between
two
parties
whereby
one
party
buys
a
currency
at a
particular
price
by a
certain
date
that
is
greater
than
two
business
days
(a
spot
transaction).
A
future
contract
is a
forward
contract
with
fixed
currency
amounts
and
maturity
dates.
They
are
traded
on
future
exchanges
and
not
through
the
interbank
foreign
exchange
market.
Options
A
currency
option
is
similar
to a
futures
contract
in
that
it
involves
a
fixed
currency
transaction
at
some
future
date
in
time.
However
the
buyer
of
the
option
is
only
purchasing
the
right
but
not
the
obligation
to
purchase
a
fixed
amount
of
currency
at a
fixed
price
by a
certain
date
in
future.
The
price
is
known
as
the
premium
and
is
lost
if
the
buyer
does
not
exercise
the
option.
Risks
Although
Forex
trading
can
lead
to
very
profitable
results,
there
are
risks
involved:
exchange
rate
risks,
interest
rate
risks,
credit
risks,
and
country
risks.
Approximately
80%
of
all
currency
transactions
last
a
period
of
seven
days
or
less,
while
more
than
40%
last
fewer
than
two
days.
Given
the
extremely
short
lifespan
of
the
typical
trade,
technical
indicators
heavily
influence
entry,
exit
and
order
placement
decisions.
|
Exchange
rates