Forex trading formation

The total amount of currency trading involving these 18 pairs represents the majority of the trading volume in the FX market.

The price of the currency is a direct reflection of what the market thinks about the current and future health of the economy of that particular country compared to other countries' economies. When the price of the pound changes in relation to another currency and you have correctly predicted the direction, you have made a profit. Your soccer ball has lost value and if you want to make a profit on your sale, you need to pump up the asking price. The symbols used with currency pairs are always listed as three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country's currency.

USD stands for United States dollars. NZD stands for the New Zealand dollar. Those currency pairs that are not paired vs. These two pairs can be found in the group of pairs known as the "commodity pairs". The first currency of a currency pair is referred to as the "base currency" and the second currency is called the "quote currency".

The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency. All Forex trades involve the simultaneous buying of one currency and selling of another, but the currency pair itself can be thought of as a single unit, an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and sell the quote currency. The bid buy price represents how much of the quote currency is needed for you to get one unit of the base currency.

Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. The ask sell price for the currency pair represents how much you will get in the quote currency for selling one unit of the base currency. If you sold the currency pair, you would receive 1. The answer is the interaction of supply and demand. How do supply and demand affect prices?

In this lesson, we will show how the supply and demand for the two currencies that make up a currency pair move its market price from moment to moment. Market Price Basics In earlier lessons, we have shown how Forex traders want to make money by buying before the price goes up and selling before the price goes down. Now we are going to talk about how and why the market prices of currencies move. How do Supply and Demand Work?

Supply and Demand Theory The market price of anything bought and sold in a free market like Forex moves for one reason only: changes in supply and demand. There is no other reason why the market price moves. For example, suppose the exchange rate of the Euro against the US Dollar is at 1. This means it costs 1.

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Let's say a bank puts order into the market to buy million Euros right away at the best market price it can get. That's a big order, and it significantly increases the supply of US Dollars and the demand for Euros in the market. This is because the Bank's buy order will consume all the selling orders at 1.

Predictions and analysis

You see, no trade can be made unless there is someone to take the other side. Supply and Demand Analysis As you can see, a Bank that needs to buy a large order like million Euros would be foolish to try to get it all at once at the market price, because it would almost certainly get it at an average price higher than the current market price. The Bank would be putting the price upon itself. Instead, the Bank would probably decide on certain market price levels where it expects US Dollars will be in demand and lots of Euros will be available at what the Bank considers to be relative bargain prices.

That way, the Bank can quietly buy some Euros every time the market price gets to these levels, eventually accumulating all its million Euros at a lower average price. Stop and Limit Orders So far, we talked only about market orders. Market orders are orders that tell your broker or exchange to make a trade immediately, at whatever price they can get for it. There are two other kinds of pending orders, both conditional upon price reaching a certain level, which you should know about: stop orders and limit orders.

Stop orders are orders you tell your broker to execute at a certain price that is worse than the current price. These orders are often used to enter breakout trades, which we will talk about later. Limit orders are orders you tell your broker to execute at a certain price that is better than the current price.

Stop orders should not be confused with stop losses. A stop-loss can be either a stop or limit order telling your broker to get you out at a certain price if your trade becomes a losing trade. This is an important way for traders to limit risk. You should know that large limit and stop orders, as well as market orders, can move the market price if they are visible to market participants. In this lesson, we've talked about how and why the market prices of currencies move. The most important thing for you to remember is that only one thing moves the market: supply and demand from buyers and sellers.

Traders profit by buying where there is demand and selling where there is supply. How to know which one of these brokers is right for you when you are ready to choose an online broker? In this lesson, we will explain a little about how online Forex brokerages work, and outline the important questions you should ask in determining which one to open an account with when you are finally ready to take that step.

Choosing an Online Broker In the previous lesson, we showed how the supply of and demand for currencies changes price.

Now we are going to talk about how Forex traders actually make trades. For example, if you buy or sell the stock of a company that is listed on the New York Stock Exchange, you have to do it through the exchange itself. Everyone gets the same prices. Forex is different. You can exchange currencies anywhere, and it is the biggest market in the world. Most of the currency traded comes from four large banks that do not deal with retail clients like us.

Instead, retail traders with accounts from a few hundred to thousands of dollars trade Forex through Forex brokers. Forex brokers are companies which provide an opportunity for us to trade Forex over the internet in small sizes. There are some banks that also offer Forex brokerage services to larger retail clients. How to choose a broker, then? How to Choose a Broker The security of your money is the most important concern. You should be able to withdraw your money whenever you want to.

Avoid any brokers that look financially unhealthy, or have bad reputations about paying their clients. Next, you should think about any legal or tax issues that might affect you. For example, residents of the U. Tax residents of the U. Areas that you should consider include: Reliability and speed of trade execution. Spreads effectively are a commission your broker charges you on every trade you make. A range of currency pairs offered. Some brokers offer you the chance to trade more currency pairs. This might not be so important to a new trader, who could be sticking to the major pairs, which usually have cheaper spreads or commissions.

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