The Currency Market
The foreign exchange market is the largest financial market in the world. Nearly $3.2 trillion worth of currencies trade back and forth across the Currency market every day.
Trading Currency Pairs
Before you can determine if a currency pair will be going up, down, or sideways, however, you need to determine which currency in the pair is getting stronger and which is getting weaker compared to the other.
The first currency listed in the currency pair is called the base currency and the second is called the quote currency. When you look at the price of a currency pair, it tells you how many of the quote currency it would take to buy one unit of the base currency.
Buying a Currency Pair
You can make money in the forex market if you buy a currency pair when the base currency is strengthening compared to the quote currency.
Selling a Currency Pair
You can make money in the forex market if you sell a currency pair when the quote currency is strengthening compared to the base currency.
The Mechanics of Trading Currency Pairs
You can lever, or increase the investing power, of your forex accounts by using some of your own money to enter a trade and then borrowing the rest. For example, the Currency market allows you to control $100,000 with as little as $1,000 of your own money. That means you risk only 1% of the position with your own money. You can borrow the remaining 99% of the purchase price.
Margin is the money you set aside with your dealer for safekeeping to prove that you are able to cover your losses. For example, if you buy the EUR/USD, you will be required to set aside 1% of the position size as margin. That means if the position size is $100,000, you will be required to set aside the equivalent of $1,000 to prove to your dealer that you can cover losses of at least $1,000 should your trade move against you. Different currency pairs have different margin requirements.
Fundamentals Make Currency Pairs Move
The key to making money in the Currency is understanding what makes currency pairs move.
For example, If the economic fundamentals of the United States are improving, the USD will most likely be getting stronger because Currency investors will be buying dollars. Conversely, if the economic fundamentals in the United States are declining, the USD will most likely be getting weaker because Currency investors will be selling dollars.
Currency options are the next frontier in forex trading. They provide you just what their name suggests: options in your Currency trading.
If you are looking for a way to add flexibility to your trading, Currency options allow you to not only take advantage of movement in a currency pair but also limit your exposure to risk. You can make money with options when currency pairs are moving higher, when currency pairs are moving lower, and even when currency pairs are moving sideways.
The Commodity Market and the Currency Market
The rise of global demand for commodities has tied the commodity and the forex markets closer together. Virtually every economy around the world has to import some of the commodities it consumes. To buy these commodities, importers must exchange their currency for the currency of the economy from which they are importing the goods. This transaction drives the demand for the exporter’s currency higher, increasing the value of that currency; it also drives the supply of the importer’s currency lower, decreasing the value of that currency.
Bond Market and the Forex Market
Investors who wish to buy government bonds must buy these bonds with the currency of the represented government.
Stock Markets and the Currency Market
In order to invest in stocks in the United Kingdom, foreign investors must first convert their currencies into GBP. This increased demand for GBP drives its value higher. At the same time, the increased supply of international currencies on the market drives the value of these currencies lower.
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