There are five major currencies that are traded most often. They are the US Dollar (USD,) the Euro (EUR,) the Japanese Yen (JPY,) the British Pound (GBP,) and the Swiss Frank (CHF.) There are certain foundations that also consider the Australian Dollar (AUD) a major currency.
At some point in the near future, at least we hope the Chinese government will remove the restrictions presently placed on the trading of there national currency and allow it also to be freely traded. As we mentioned earlier currencies are always traded in pairs. The initial currency in the pair is called the base currency and the next currency is named quote or counter currency.
The base currency is the denominator and the counter or quote currency is thus the numerator in the ratio. The value of the base currency is always one. Thus the exchange rate is how many of the counter currency must be paid to buy the base currency. The bid price for a counter currency is always lower than the ask price.
The reason for this is that the bid price, which represents how much will be received in the counter or quote currency when selling one unit of the base currency, is always lower than the ask price, which represents how much must be paid in the counter or quote currency when buying one unit of the base currency. An example of a trade might be the following.
A trade of EUR/USD bid/ask currency rates at your bank may be 1.1015/1.2015, representing a spread of 1000 pips (also called points, one pip = 0.0001.) The smaller the spread the better for the investor. The reason for this is that in order to profit the currency needs to make a smaller movement.
The Advantages and Disadvantages of Margins.
The term "Margin" is essentially a loan by a brokerage firm to an investor that is a client of that firm. As with any loans, interest is paid on that loan. The longer the loan is outstanding the higher the interest expense associated with that loan. There are many ways the use of margins can work against a currency investor.
In fact, the number one reason novice investors fail to succeed in the currency markets is there lack of knowledge of margins. The good new is that margins can also work for the investor and produce extremely large profits with a very small investment. Learning how to make margins work for you as opposed to against you is one of the most important concepts a Forex trader must understand.
Fortunately today there are many exceptional Forex courses that instruct this vital concept in detail.
An example of how this could work against is when an investor takes a long term position in a currency utilizing a large margin. If they were to hold that currency for a few months and make a small profit when they sold they could still lose money on the investment due to the interest expense associated with the borrowed funds, called margins.
It is of the utmost importance if you intend on trading the currency markets that your understanding the benefits and pitfalls of the use of margins is at the highest level. There are other techniques that can be utilized instead of margins that can also produce the same large profits with a very small investment. If for no other reason than understanding margins a new trader would be wise to enrol in a course that teaches the ins and outs of there use.
