How prices are quoted: Since the market works on the fluctuation of one currency against another, prices are normally quoted in one currency relative to another. These are called currency pairs and the most commonly traded currency pairs are:
-EUR/USD: the Euro and US dollar.
- GBP/USD: the British pound and US dollar.
- USD/JPY: the US dollar and Japanese yen.
- USD/CHF: the US dollar and Swiss franc.
- AUD/USD: the Australian dollar and US dollar.
- USD/CAD: the US dollar and Canadian dollar
As you can see, all pairs include the US dollar which accounts for over 80% of trading volume. It is also possible to obtain quotes for the other currencies, one against the other [for example the euro against GBP] and these are known as "cross"
Because of the large lot sizes. small fluctuations matter and prices are therefore quoted to four decimal points except for USD/JPY The smallest measure of a variation is called a "point" or "pip"(.0001). If the EUR/USD price changes from 1.3050 to 1.3055, the movement is described as 5 pips. The term pip is used for reckoning spreads or profits because different people operate in different currencies and the term pip is a common measure for any currency.
Understanding a price quote: in the above example, the EUR is called the base currency and the USD the quote or variable currency. Now if you were to ask your broker for an actual quote you would get a two- way quote which looks like this:
EUR/USD 1.3050 1.3055
It is called a two-way quote because it includes a buy and sell price and you can choose either to buy or to sell. In other words, the first price is the bid price, which indicates how many units of the quote currency you would get when you sell one unit of the base currency. In the above example, you would get $1.3050 if you sold one euro. The second price is the ask price, which represents how many units of the quote currency you pay when you buy one unit of the base currency. In this example, you would pay $1.3055 to buy 1 euro.
It is also possible for you to trade Forex by trading derivatives, such as currency futures. However, it is important to remember that derivatives are an entirely different class of financial instruments and trading in these markets is quite different from trading in the cash Forex market. Spot Forex markets offer the following advantages:
-higher volume and liquidity and thus superior order execution
- Much more active around-the-clock trading
- Price quotes that are easier to understand and
- A higher degree of risk so that effective risk management provides a high degree of return
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