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The concept of currency pair is the most fundamental and undeniably the most important concept in Forex trading. This little concept needs to be thoroughly understood in order to be able to even begin swimming in the sea of forex trading; a sea that commands irrefutable persistence. This article will elucidate the most basic elements of forex trading.
The most basic statement which needs to be grasped is that it’s impossible to trade a currency by itself. A pair is required to deal and make money. The pairs follow a notation that expresses the currencies being traded. The symbol is always represented in the form of “ABC/XYZ”; where both the symbols represent a country’s currency. Common symbols include:
USD: for US Dollar.
EUR: for the currency of European Union.
JPN: for Japanese Yen.
INR: for Indian Rupee, etc.
The currency pair resembles a fraction. The numerator is referred to as base currency and denominator is referred to as counter currency. When an order is placed to buy ‘XYZ/ABC’, it corresponds to the situation of buying the numerator and selling the denominator. If you’re selling this pair, you’d be selling the numerator and buying the denominator. The action that is conveyed on the base currency is always opposite to that of the counter currency. For clearer understanding, individuals prefer to think of entire pair as one commodity. This thinking also enables you to place trades. It’s however mandatory for an individual to be aware of the concept of base/counter for ussues dealing with fundamental analysis.
Short selling is the situation where an individual sells a commodity first, and then seizes the opportunity of buying it at a lower price later. In forex this gets a little confusing as one is always buying one currency and selling another. If an individual sells a pair, he/she simple flips which one is bought and which one is sold. The transaction essentially remains the same. This allows short selling, free of restrictions. The characteristic which makes forex trading two times more lucrative than stock market while talking about short selling is the fact that it money can be enhanced in both the directions. The shortcoming of stock market is that the market needs to rise for you to say cheers! But in forex, rise or fall, create a win-win situation.
Leverage is the magical concept of controlling a lot of money from little money. The forex market is arguably the market with highest leverage in the world. Three different types of leverages are available in forex trading. 200:1 is the highest leverage possible. This implies that on a $1 margin, the individual will be allowed to trade with $200 by the trading provider. Thus, on a 1% rise, an individual makes 200%.
The margin for forex trading is a real blessing for the trading provider. One only needs to know that the amount money required to place a trade is equal to the margin.