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How The Forex Market Works

How forex trading works
Invest in foreign exchange or forex is to buy a coin while another for sale. If the currency you have bought increased in value against the currency that has sold, you can close your position with benefits. If not, you will get a loss

What are currency pairs?
Investing in currencies always involves the sale of a currency to buy other. For this reason, they operate in pairs that show what will be bought and which will be sold. Each currency in the pair is represented with a three letter code: two letters which normally correspond to the region and another designating the own currency.

GBP/USD, for example, is a currency pair formed by the pound sterling (in English, Great Britain pound) and the US dollar (US dollar). To operate this pair, you are buying pounds and selling dollars

Base currency and quoted currency
The first currency that is named in the pair is called the base currency, and the second is the quoted currency. The price of a pair is determined by calculating how much is worth one unit of the base currency in the quoted currency.

Therefore, in the above example, GBP is the base currency and USD is the quoted currency. If the GBP/USD trades at 1,35361, it means that one pound is equivalent to 1,35361 dollars.

If the pound rises against the dollar, then one pound will be worth more dollars and increase the price of the pair. If the pound falls, the price of the pair will drop. Thus, if thinks it is likely that currency base of a pair will strengthen against the quoted currency, can buy the pair (go long). If you think that it is going to weaken, it can sell the pair (go short)

The spread
The spread is the difference between the purchase price and the selling price of a currency pair.

As with other financial markets, when you open a forex position two prices will be offered. If you want to open a long position, it operates the purchase price, which is slightly more than the market price. If you want to open a short position, it operates the selling price, slightly below the market price

What are pips?
When the price of a currency pair increases or desciente, this movement is measured in pips. A PIP is normally equivalent to a movement of a digit in the fourth decimal of a couple. Therefore, if the GBP/USD moves from 1,35361 to 1,35471$, there will be moved a PIP.

The exception to this rule occurs when the quoted currency is denominated in values many smaller, being the most notable example of the Japanese yen. In this case, a PIP relates to a movement in the second decimal.

Decimals that are then of the pipo are called fractional pips or pipettes

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