The currencies are traded in pairs and therefore exchanged one for the other this is the reason this is called the exchange rate. The most of the currencies are traded against the US dollar, the euro, the Japanese yen, the British pound or the Swiss franc. These currencies have the greatest importance on the market and this is why are called the major currencies. According to a few other researchers we should include as well the Australian dollar within the group of major currencies.
When we analyze a pair we refer the first currency as the base currency and the second as the counter or quote currency. It is important that the counter or quote currency is the numerator in the ratio, and the so called base currency is the denominator. As a strict rule the value of the base currency always equals 1, which is the reason why the exchange rate tells how much of the quote currency should be paid to obtain 1 unit of the base currency. This same exchange rate as well tells the seller how much quantity is received in the quote currency for one of the base currency.
The Major Players in the Foreign Currency Exchange Market - FOREX
Since the US dollar is the centerpiece of the market, it is normally considered the ‘base’ currency for quotes. In the “Majors”, this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 123.50 means that one U.S. dollar is equal to 123.50 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote listed above were to increase to 124.01, that would mean that the dollar is stronger because it will now buy more yen than before.
Some exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, which means that one British pound equals 1.4366 U.S. dollars. In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
So if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening. Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
Trading Timeframes
Long term traders will work from end of day data and look to hold trades for a few weeks up to many months. Usually trend trading.
Advantages
No need to watch the markets intraday.
Fewer transactions means lower commission costs.
Cost of equipment and data is minimal.
Disadvantages
Large equity swings on single positions with large stops.
Usually only 1 or 2 exceptional trades a year so patience is essential.
Bigger capitalization required to ride longer term swings.
Frequent losing months.
Working from intraday data and looking to hold for a day up to a week. Usually swing trading.
Advantages
More opportunities for trades.
Less chance of losing months.
Less reliance on one or two trades a year to make money.
Disadvantages
Transaction costs will be higher.
Intraday data adds to costs.
Overnight risk becomes a factor.
Working from intraday data the day trader will attempt to take small profits from intraday swings. All positions will be exited at the market close.
Advantages
Many trading opportunities in a day.
Much lower chance of losing months.
No overnight risk.
Reduced margin requirements due to no overnight risk.
Disadvantages
Transaction costs will be high.
Psychologically more difficult due to frequency of trading.
Profits are limited by needing to exit at the end of the day.
Data costs are high as real time data is essential
Market Orders
The most common order is the market order, which is to buy or sell at market. Actually, what this means is that you are buying the quote currency at the brokers ask price or you are selling short at the brokers bid price, which is always lower than the ask price. This is how most brokers make their money, and why they do not need to charge commissions. The spread is the difference between the bid and ask prices. In most cases, the most actively traded pairs will have the smallest spreads, and less actively traded currency pairs will have larger spreads. Spreads also increase when there is increased volatility in the market, even for frequently traded currency pairs.
As soon as you buy or sell short, the spread is immediately subtracted from your equity, because if you immediately closed the transaction even before there are any price changes, then you will lose the amount of the spread.
Entry Limit Orders
An entry limit order is an order for a currency pair that is away from your broker’s bid/ask price. In other words, your limit order to buy is not your broker’s ask price, or your order to sell is not your broker’s bid price.
Your order does not compete with any other orders. Only your broker sees your order—no one else. So there is little point in trying to place an order inside the spread, where the transaction price—either a buy or a sell—is between the bid/ask price. Many trading platforms do not even allow such an order to be entered, but even if they did, the broker probably won’t complete the transaction unless the market moves enough in the direction of your order.
There are some forex brokers who are advertising a no dealing desk, where your order is shown to some banks that are in the broker’s network, and, in these cases, the trading platform does allow you to place an entry limit order inside the spread, but even this is not really effective, because only a few big banks see your order, and if it is a small order, they probably won’t have much interest. This is in contrast to an American stock exchange, where the best bid/ask prices from all participants is displayed in the system, allowing just about anybody to see those stock prices.
