Forex glossary of terms
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Forex trading is a simple task to pick up. One can find anything he needs to trade Forex on the internet. For a free demo of how easy it is, anyone can open an account with 50 000 dollars of virtual money already in place.
With the spot market, trades are made and then settled two business days later. If on Tuesday someone were to sell 50 000 USD then 50 000 USD would be delivered to the recipient on Thursday, barring that the position is not rolled over. Stock is automatically rolled over in any "open" position meaning that the trade is forwarded two business days to the next settlement date.
Exchange rates are given in accordance with the Interbank and are considered to be open for trade. All spot rollover transactions will contain a difference between the two currencies in interest rates that will be reflected. In the event that the Forex trader is "long" then the currency that has the higher interest rate should gain on-the-spot rollover due to its higher value when compared to the short currency in the pair.
The financial gain is dependent on the interest rate differential that exists between the two currencies and will move day-to day in accordance with the movement of prices. Take into consideration that the rollover for USD/JPY can be $2 per lot and the rollover for GBP/JPY can be $15. Day traders who never hold a position overnight are no affected by rollover trading.
Any position open on Wednesday and kept past 5pm ET will have an amount added or subtracted sue to rollover that can be three times greater than this amount. The 3-Day rollover is in play due to settlement of Forex trades that occur over the weekend as weekend are not considered to be business days.
Currencies are forever traded and priced in pairs in forex trading. One currency will always be bought and another will always be sold. The buyer must choose which pair he wants to trade with. This can be done strategically. If a buyer thinks the value of the US Dollar will increase against the Euro then he would by the US dollar in the USD/Euro pair.
The ultimate objective is to attempt to trade one currency for another expecting that the price you traded a currency at will fluctuate accordingly so that the purchased currency will increase its value compared to the one that was sold. Supposing that a bought currency's price has increased in value then when sold, one is able to generate profit. When a person has either bought or sold one currency pair without buying or selling back the same amount it is considered to be an open position and it will not be closed until the person buys or sells back an equal amount.
In a currency pair, the dominant currency of the pair is referred to as the base currency and the second currency in the pair is called the quote or counter currency. When the U.S dollar is involved it is usually considered to be the base currency as it is one of the world's most dominant currencies. As such quotes for other currencies it is paired against are usually given as a unit of 1 Dollar. USD/JPY and USD/CAD are quoted as how many Yen and how many Canadian dollars you get for one USD. The Euro, Pound and Australian dollars are exceptions to this rule. They are always dominant and quoted as dollars per foreign currency.
Forex, like all financial products that are traded has quotes that are known as a bid and an ask. A bid price is one which a forex trader will buy a base currency, meaning you are selling a base currency in exchange for a quote or counter currency. The ask price is just the opposite. It is the price at which a forex trader will sell a base currency meaning you are buying a base currency in exchange for a counter or quote currency. The spread is whats known as the difference between the bid and the ask price the trader is asking for. Tighter spreads represent firmer prices when buying or selling a currency pair.
The required margin deposit should not be viewed as a down payment but rather as good faith deposit which ensures and protects from loses in trading. This margin deposit gives you flexibility to keep to a position significantly larger than the actual value of the account. Huge amounts of leverage, up to a 200:1 ratio in margin management capabilities, are provided by trading platform.
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