Forex trading can be truly overwhelming to the uninitiated. Even though there are only 30 currency pairs in the currency exchange market, compared to the thousands of stock offerings in the equity market, the numerous methodologies and theories inherent to it can pose a real challenge. Being familiar with commonly used jargons is therefore necessary before you even start speculating on the foreign exchange market. Currency Pairs
Currencies are always quoted in pairs in Forex trading. For example, to juxtapose the value of the American dollar to Canadian Dollar, it should be written as USD/CAD. The 1st item on this quotation is called a quote, the 2nd currency is termed as the base. When you see a USD/CAD quotation = 1.027, it means that every United States Dollar is valued at 1.027 Canadian Dollars.
Going Short, Going Long
These jargons are heard when making a trade. If traders go short, they want to put a currency up for sale. Traders do this when a currency’s price is predicted to go down. Later on when the currency’s price falls as predicted, he can buy it back for a price that is much lower than when he sold it, thus making profit. “Going long” on the other hand means placing a buy order. Therefore long positions mean buying a particular currency with the expectation that its value will rise.
Fundamental analysis vs. Technical Analysis
Among financial markets, foreign exchange is the most volatile. The reason for this volatility stems from the fact that the exchange rates existing between currencies are influenced by a host of variables. Among market determinants, the existing economic climate is considered pre-eminent. Having said such, speculating on the Forex market requires evaluating important economic factors. The strategy of studying these economic indicators, which include a country’s GDP and employment reports, is called fundamental analysis.
Forex Investors may also take market activity and price shifts into account to make sound trading decisions. This technique is referred to as technical analysis and many investors give preference to this method.
Margin Buying
Margin buying have become somewhat de rigueur in Forex trading because it allows traders to buy bigger currency contracts with a small capital. Leverage is often considered a double-edged sword because it can magnify your profits when price movements go in your favor. If the investment moves against what the investor predicted, his losses can possibly be much larger than the amount he used for leverage.
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