Written by dustin pass
Tuesday, February 8th, 2011
Forex Transaction Basics
So on to our next topic in this Forex trading education series. Today I want to cover some Forex transaction basics then we will discuss the four major pairs and the there trading times. This Forex Trading Education series is set up for every trader and over the next few months you can expect to see a variety of topic covered from the simplest concepts to some of the more complex strategies that are used. So lets talk about some Forex Transaction basics. First of all, before we can trade we must establish a relationship with a Forex broker by depositing funds in a margin account. A margin account allows us to leverage our money 50.1 in the US and as much as 400.1 and some international brokerage firms. At 50.1 this means for every $1000.00 dollars we have in the market we are controlling $50,000.00 worth of currency. However, we are only responsible for our $1000. The Currency market moves in increments called PIPS (price index points). The value of a PIP is calculated buy the broker’s state of the art Dealing Station and varies from one currency to another. Currency units are divided into 100 parts. 1 pip is equal to 1/100th of a currency unit.
7 minutes later and the market has moved 15 PIPs.
The Four Majors
There are many currencies available to trade (approximately 16 on most dealing platforms); however, 85% of all trading volume occurs on the following four pairs:
- EUR/USD (Euro/US Dollar)
- GBP/USD (Greater British Pound/US Dollar)
- USD/CHF (US Dollar/Swiss Frank)
- USD/JPY (US Dollar/Japanese Yen)
One of the major advantages to the Forex over comparable markets is the fact that you do not have thousands of items to choose from when selecting a trade. Therefore, you can focus your studies on a select few. This allows you to become familiar with the way a specific currency moves. Each currency pair has an average daily range and volatility level. The following is the daily average range of the four majors:
- EUR/USD 120 Pips
- GBP/USD 142 Pips
- USD/CHF 150 Pips
- USD/JPY 92 Pips
What does this mean for a trader? This means that, on average, in any given 24 hour period one can expect the specific currency combination to move within a range equal to the average daily range. We can use this information to trade by analyzing the current market movement since Midnight eastern. For example, if the EUR/USD has been trading in a range of 40 pips since midnight, it is currently 8:45AM, and the market breaks out of this range then it is a safe assumption that it will make an attempt to travel an additional 80 pips. Keep in mind that these averages can fluctuate. So thats it for today’s post but stay tuned. My next post in this Forex Trading Education series will be on emotions which is a very important part of trading.
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