Forex Currencies
The Most Popular Currencies
The most commonly traded forex currencies in the world are the U.S .Dollar, Euro, Japanese Yen, Swiss Franc, British Pound, Australian Aussie, New Zealand Kiwi, and the Canadian Looney. Although much has been written and discussed about the U.S. Dollar losing its value relative to the rest of the world recently, the U.S. Dollar is still the king. One reason for this is that the economy is by far the largest economy in the world. As such, 80 percent of all currency transactions involve U.S. Dollars. The U.S. Dollar also happens to account for 60 percent of the world’s reserve currency.
How to Read and Understand a Quote
One of the basic things you should know about trading is that forex currencies are always traded in pairs. The value of a currency is always determined by comparing it to the value of another. Take for example the Euro / USD quote of 1.3961. This quote basically means that its takes $1.39 to buy one Euro. If you look at it from a higher dollar perspective, to buy 10,000 Euros, it would cost $13,961 USD. In all currency quotes, the first currency in a pair is known as the base currency and the second is known as the counter currency. In this case, the Euro is the base and the US Dollar is the counter currency.
When the rate of forex currencies increase, it means that it takes more of the counter currency to buy the base currency. For example, if the Euro / USD rate increases to 1.5236 ( up from 1.3961 ) it would cost $15,236 to buy 10,000 Euros. In other words, an increase in value signals to us that the Euro is becoming stronger. On the other hand, it also means that the US Dollar is weakening. Now, consider when the opposite occurs, if the currency rate decreases back to 1.3961. This would mean that the Euro has weakened and the US Dollar has strengthened because it takes a lesser amount of US dollars to buy the same amount of Euros.
What is a PIP ?
If you become more involved with trading forex currencies, regardless if you want to learn the old fashion way or if you start trading with automated forex systems, you will definitely need to understand the definition of a PIP. PIPS, are what traders are looking for nonstop, and they are the center of the forex trader’s universe! A PIP, is the smallest move a currency can make in a market. Going back to our original Euro / USD quote of 1.3961, an increase in the quote to 1.3962 would equate to a 1 PIP increase. A decrease in the quote to 1.3961 would equate to a 1 PIP decrease. Typically for US dollar pairs, it equals 1/100th of 1 percent. Although a 1 PIP move may not seem like much, when you look at the amount in terms of the standard position size of 100,000 the cost of 1 PIP equals 10 dollars. An increase in 1 PIP in our original example would mean it cost $139,630 to buy 100,000 Euros. As you can see, the amount of PIPS that a currency moves determines your profit, which is why you’ll see this term in just about every forex website online.
Trading in the Foreign Exchange Market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the Forex market. Don’t trade with money you can’t afford to lose.
