Currency Trading For Dummies®

It also reflects the market quoting convention where the first currency in the pair is known as the base currency. The base currency is what you’re buying or selling when you buy or sell the pair. It’s also the notional, or face, amount of the trade. So if you buy 100,000 EUR/JPY, you’ve just bought 100,000 euros and sold the equivalent amount in J

To make matters easier, forex markets refer to trading currencies by pairs, with names that combine the two different currencies being traded against each other, or exchanged for one another.

Most currency pairs are quoted using five digits. The placement of the decimal point depends on whether it’s a JPY currency pair — if it is, there are two digits behind the decimal point. For all others currency pairs, there are four digits behind the decimal point. In all cases, that last itty-bitty digit is the pip.

The second currency in the pair is called the counter currency, or the secondary currency .

Cross trades can be especially effective when major cross-border mergers and acquisitions (M&A) are announced. If a UK conglomerate is buying a Canadian utility company, the UK company is going to need to sell GBP and buy CAD to fund the purchase. The key to trading on M&A activity is to note the cash portion of the deal.

these quoting conventions evolved over the years to reflect traditionally strong currencies versus traditionally weak currencies, with the strong currency coming first.

The Bank for International Settlements (BIS) is the central bank for central banks. Located in Basel, Switzerland, the BIS also acts as the quasigovernment regulator of the international banking system. It was the BIS that established the capital adequacy requirements for banks that today underpin the international banking system.

A pip is the smallest increment of price fluctuation in currency prices. Pips can also be referred to as points;

Currency reserve management refers to how national governments develop and invest their foreign currency reserves. Foreign currency reserves are accumulated through international trade. Countries with large trade surpluses will accumulate reserves of foreign currency over time. Trade surpluses arise when a nation exports more than it imports. Becau