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Understanding Exchange Trading
Understanding Exchange Trading


Understanding the Jargon of a Forex Trade

If you are new to the world of foreign exchange (forex) trading, some of the terminology can be a little daunting. There are ‘spreads', ‘bids', ‘asks', ‘movements', ‘hedges', ‘quotes', ‘bases' and ‘counters'. Indeed, if you didn't know you were trading forex, you may well wonder if you were in your local supermarket! To make things a little easier for you, here is a brief explanation of some of the more commonly used jargons in foreign exchange trading:

spread

”: a ‘spread' is effectively a forex brokers commission. Unlike stock foreign currency exchange trading transactions, forex traders rarely charge their customers any commission fee. Consequently, to make a living as forex brokers, they need to create a spread, which is the difference between the price they're willing to buy at and the price they're willing to sell at.

bids

”: a ‘bid' is the price that a forex broker is willing to buy your currency from you at.

ask

”: the ‘ask' price is the price that a forex broker is willing to sell at.

The difference between a forex brokers's bid price and ask price is the spread. So, if a forex broker is willing to buy £1 for $1.40, but willing to sell £1 for $1.35, then the forex brokers spread is 5 cents. As there is no real regulation or control over a forex broker's spread, knowing this is an important factor of foreign currency exchange trading as this is where you will be making a profit on the deal and so you need to try and ensure you minimise the forex broker's spread as much as you possibly can.

movements

”: a movement is a change in the value of the currency you have. If you have an upswing movement this means that the value of your forex has increased and you are now making a profit. If you have a downswing movement this means the forex you have has decreased in value and you are making a loss. A number of important factors influence movements, such as economic results, unemployment figures, interest rates, so you need to monitor all of these to try and determine whether or not you are going to get a favourable movement before deciding to “take a position” (another piece of jargon meaning buy).

hedges

”: is where you are not entirely sure how the currency is going to move over a period of time. To try and insure against any loss you make, you take an option to purchase the currency at today's rate, but you'll pay at a pre-determined later date. This is known as hedging and can be extremely useful. Of course, if the currency moves in your favour, you could turn a profit in to a loss by hedging early, so make sure you only hedge if you are worried about the long-term prospects of your chosen currency.

quotes

”: is where you have two currencies and the quote is the value of one against the other. The first currency quote is known as the trade quote and the second quote is the counter currency. $ - £ would mean $ is your trade quote, £ is your counter currency and the whole thing is a currency quote (in your local bank you may hear them call this a foreign exchange rate).

Understanding Foreign currency exchange trading Strategies

As with all forms of investments, foreign exchange (forex) traders rely on trading strategies to try and help them determine whether or not a currency is going to strengthen or weaken against other currencies. Insofar foreign currency exchange trading strategies go; there are two main principal schools of thought. On the one hand, there are those forex traders who rely on the fundamental analysis strategy. On the other hand, there are those who believe in a technical analysis strategy. Below we take a quick look at the fundamentals of both main types of foreign currency exchange trading strategy.

Fundamental foreign currency exchange trading strategy

A forex trader who relies on the fundamental foreign currency exchange trading strategy to determine whether or not their elected currency is going to appreciate or depreciate believes in the underlying factors that hep determine a foreign exchange rate. Thus, to a fundamentalist such factors as what the rate of interest the central bank is offering, unemployment figures, consumer confidence, national debt, gold prices, the stock exchange index, are all crucial elements in helping them determine whether or not to buy or sell. Moreover, every time one of these figures changes, they need to reassess whether or not they should continue to hold that forex, or whether the time has come to sell. Fundamental foreign currency exchange trading strategy is popular among professional forex traders.

Technical foreign currency exchange trading strategy

As the name might indicate, technical foreign currency exchange trading strategy relies heavily on technical equipment, such as computers and computer software programs, to help them decide whether the time is right to buy or sell. Included in most technical analysis strategy is a belief that currencies are predicable by way of their previous movements and that if a forex trader studies past currency movements, this can help then to determine where the currency should be going in the future. Technical foreign currency exchange trading strategy is most popular among online forex day trader – although professional forex trader do pay more than just lip-service to the many short-term and long-term benefits this system can bring a forex trader.

Which strategy should you use?

A lot of good and bad things could be said about both systems. Truth is, it is probably sensible if you use elements of both systems in your day-to-day foreign currency exchange trading decisions. A general comment that can be made about the two systems, however, is that if you consider yourself a long-term investor, i.e. more than 3 to 6 months, in a currency, then it is probably sensible if you make more use of the fundamental foreign currency exchange trading strategy than the technical. Conversely, if you are a short-term forex trader, such as a day trader, then it may be more beneficial for you to adopt the technical foreign currency exchange trading strategy, as the underlying principles of the fundamental approach would take too long to come through the system, by which time you'll most probably have traded the currency several times. In an ideal world, of course, you would be making use of both strategies at the same time to create a hybrid strategy that would give you better insight into how to make a profit foreign currency exchange trading. And remember, anything that can give you a bit of leverage and help you to make a profit should be given serious consideration.



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