Currency trading

The mechanics of currency trading involve the following five aspects:

1. Understanding currency pairs- The basics are this, when you trade on the currencies exchange, you are doing just that, making an exchange. You simultaneously buy one currency while selling another. Thus, you always trade in pairs. The pairs involve a base currency and a counter currency. The major pairs have the USD as part of them. When a pair does not involve the USD it is called a cross-currency pair, and almost always involves one of the three most actively traded currencies, EUR, GBP, and JPY. One of these three with another country are most actively traded cross pairs. Get a good grasp on what the currency pairs mean to the forex market, and how you can choose pairs to best take advantage of news or events.

2. Going long- Next you have to know there are two strategies employed when currency trading, going long or going short. Going long means buying a currency, and then waiting for it to go higher. This strategy is often made up of buying at different levels, which is referred to as adding to longs and getting longer. Once you reach a higher level you are comfortable at, you sell what you have bought. Thus making a profit.

3. Going short- Unlike other markets, going short is just as effective a strategy as going long. This is the strategy of selling high and buying low. While it is standard in the currency trading strategies, it is often considered the lesser strategy by outsiders. However, there are some real benefits to going short. The first being that currency pair prices are as likely to go down as they are to go up, so it allows you to leverage either market condition. If you sell at various price levels it is called adding to shorts, and getting shorter. This is good terminology to know.

4. Calculating profit and loss- next you need to know how to calculate profit and loss in the forex market. This is especially critical in online margin trading as it will help you see the amount of margin you have to work with, and how long you can trade before prices move against you. Take time to understand margin balances and liquidation. It is imperative that you understand your broker's margin requirements and liquidation policies. Profit and loss is math, and it is based on position size and the number of pips you make or lose (pips are also called points). Understanding how profits and loss are calculated is necessary in evaluating risks.

5. Reading a price quote- Last you need to know how to read a price quote if you are going to understand the mechanics of currency trading. If you can't understand the quote, it is awfully hard to make money trading. Price quotes show the current bid and offer price in a specific currency. It is important to recognize that different online forex brokers use different formats for displaying price quotes on their platforms. Learn to read them.