Getting Started With Forex Trading

 I have created the following videos to help new traders to kick start them into the world of trading.

What Are Cross Currencies In The Forex?

In the time past, a cross-rate was any currency pair that did not include your home currency. The US dollar/Japanese yen exchange rate would be a cross-rate for someone in the UK or Europe, for example.

Today, however, the common definition of a cross-rate is any currency pair that does not include the dollar. Therefore, the USD/JPY exchange rate is a “major” exchange rate and not seen as a cross-rate by people in the UK or Europe, while the AUD/CAD would be seen as a cross-rate by everyone, including Australians and Canadians, even though the rate includes their home currencies.

This convention for defining a cross-rate is not accepted everywhere and you will see lists in newspapers and websites that define cross-rates differently. The US dollar accounts for about 70% of global government money reserves and 70% of world trade, so placing the dollar as a component in all the major exchange rates is not without justification. In fact, there are more dollars in banknotes and bank deposit accounts outside the US than inside the US, so it may be accurate to say the dollar is the most-used currency in some places even though it is not the home currency.

How Are Instruments Quoted In Forex?

 We can refer to foreign exchange as  two bags of money such that each bag stands for a denomination. A particular transaction at a particular time can be like buying a bag of 165 dollars in return for £100 at an airport desk. The exchange rate is $1.65 per UK pound sterling.

You may ask why is the exchange rate not £0.6061 per dollar? This the same exchange rate, just expressed differently (it is the reciprocal, or 1 divided by 1.65). The answer lies in the historical convention of quoting the price of other currencies in terms of what they cost in pounds. The pound sterling was the benchmark currency for centuries until just after World War II, meaning the central currency against which all other currencies were judged and priced.

After World War II, the US dollar became the benchmark currency and most other currencies were priced in terms of how many units of the foreign currency you could get for one dollar.

As a rule, any money not issued by your home government is “foreign.” The natural way to look at foreign exchange is to ask: “How many units of the foreign currency can I get for a fixed amount of my home currency?” This is how a tourist or an importer looks at foreign exchange. But because the dollar is currently the benchmark currency against which almost all others are priced, the dollar comes first in the name of many currency pairs, although not all. The first name in a currency pair is generally the important name and the second is the secondary or less important one.

Putting a name first is to assume that the fixed amount is denominated in that currency and the variable amount will be the other currency. In other words, the first currency is the base and you are applying a ratio to derive the price of second currency. When the European Monetary Union decided to quote the euro in the format “Euro/USD” and “Euro/JPY,” etc. it was a deliberate choice to make the euro the more important of the two currencies in every pair.

The rule is that whichever name comes first is the one that is getting stronger on higher numbers and weaker on lower numbers. If the number goes up in the pound, for example, from 1.6000 to 1.6500, it means the pound is getting stronger and by definition, the dollar is getting weaker because in this pair, the full quote should read GBP/USD. It is accurate to express the quote as $1.6000 to $1.6500, meaning the pound used to cost $1.6000 but now it costs $1.6500. Journalists usually apply the convention of putting the dollar sign in front of the price quote, although brokers and analysts tend not to insert the currency symbol.

This is also true of the euro (EUR/USD) so a higher number always means the euro is getting stronger vis-à-vis the dollar. You could say the EUR/USD moved from 1.3200 to 1.3900, meaning it got more expensive in dollar terms. If you are new to Forex, you can place an imaginary currency symbol in front to the first-named currency to get your bearings. Therefore, the price quote now looks like $1.3200 to $1.3900.

The pound, euro, Australian dollar, and New Zealand dollar are the top key currencies in which the dollar does not come first, because of historic convention. All other currencies are quoted in terms of dollars, such as USD/CHF = US dollar against the Swiss franc.

What Is The Meaning Of Forex?

 

The word FOREX is the abbreviation frequently used today for “foreign exchange,” which means the price of one currency relative to another currency. Forex prices refer to the connection  between two currencies and they come in pairs.

The word FOREX is sometimes used  synonymously  with “FX.” Both of them  are used today and both refer to the same thing, foreign exchange. The term “FX” is mostly used in the US while “Forex” was more broadly used in the UK until recently. Professional traders in the US at banks and brokers tend to use the term “FX” while “Forex” is the term used in the retail market, adopted from the British usage. Also used is the word “currency,” as in “I trade currencies” or “something happened in the currency market.”

Foreign exchange refers literally to money, or more accurately, to money in two different denominations. The “exchange” part of the term means giving one thing of monetary value in return for a different thing of equivalent value. The word exchange refers to the transaction in which each of two parties is willing to exchange his respective basket of money for the equivalent amount of money denominated in the second currency. The price at which the two parties are willing to make the exchange is the exchange rate.

The price of one currency in terms of another currency is called a “rate” and not a “price,” although the word “price” is equally valid and often used. Foreign exchange is the only market in which the word rate is used instead  of the word price.