FOREX TRADING
Currency pairs - a brief explanation and general terms
It takes some time to get used to specific conventions and terminology of currency trading, but, as it turns out later, it is all more straightforward than it seemed to be.
One of the greatest obstacles, especially to those who have never been into any kind of trade, is the fact that currencies are sold and purchased at the same time. It may be difficult to imagine in the beginning, as you need to start thinking in relative terms - if one currency goes up, the other must automatically go down.
To facilitate this, forex markets refer to currency exchange by pairs, with names of the two currencies that are exchanged or traded (e.g. EUR/USD, GBP/USD, USD, JPY) and sometimes they give the pairs certain nicknames, like USD/CHF - Swissy, USD/CAD - Loonie or NZD/USD - Kiwi.
The vast majority of forex trading involves the dollar pair, but there are other options that are alternatives to trading the U.S. dollar - cross-currency pairs or crosses. They do not include the U.S. dollar, but their rates are derived from the respective U.S. dollar pairs.
The most actively traded crosses are: EUR, JPY and GBP and are referred to as: euro crosses, yen crosses and sterling crosses.
At first sight currency pairs may seem combined in a strange order, like, for example - GBP/JPY, not JPY/GBP. The reason for this particular order is that the combinations are based on a longtime evolution of currencies - the traditionally stronger ones are placed as first in the pair, whereas the weaker ones come as second. The first currency in a pair is called the base currency and the second - the counter or the secondary currency.
Forex trading specific terms
There are some specific terms that should be familiar to anyone wishing to have a go at financial market trading:
- a long position or a long - it is a market position in which one has bought a security; in forex it is having bought a currency pair. When one wants to go long, they want the proces to go higher in order to sell at higher price than has been bought. Getting longer on the other hand means buying at multiple price levels.
- a short position or simply a short - means the never-owned security that has been sold, in forex it is a situation when the base currency is sold and the counter currency is bought. Getting shorter means selling at various price levels.
The relative values between two currencies are reflected by currency pair rates. They are not absolute and can change as currency pair proces may be going up or down in long-term trends as well as minute-to-minute fluctuations.
When one has no position on the market, it is called being square or flat. If short, they need to buy to square up; if long - they need to sell to go flat. Being square means no financial risk.