Forex Presentation Part #2
- Types of Currency Pair Quotes
There are 3 types of currency pair quotes.
These include Direct, Indirect and Cross Currency Quotes.
- Direct Currency Quote vs. Indirect Currency Quote
A direct currency quote is a currency pair where the domestic currency is the quoted currency.
EUR/USD – EUR = domestic currency & USD = foreign currency
An indirect quote, is a currency pair where the domestic currency is the base currency…in other words…the inverse to a direct quote.
USD/EUR – USD = domestic currency & EUR = foreign currency
- Cross Currency Quote
The third type of quote is the cross currency quote.
When a currency quote is given without the USD as one of its currencies, this is called a cross currency.
The cross currency pairs that are traded the most are EUR/GBP, EUR/CHF and EUR/JPY.
- When trading a currency pair, there is a bid price (buy) and an ask price (sell), in relation to the base currency.Example:EUR/USD –4000/05Bid = 1.4000
Ask = 1.4005
Bid & Ask
- The spread is the difference between the bid and ask price.In the previous example EUR/USD –4000/05
The spread equals 0.0005 or 5 pips
Spreads & Pips
- Pips or points are the incremental changes in a forex quote.5000 to 1.5001 = 1 pipWith major currency pairs such as EUR/USD, GBP/USD and USD/CAD – 1 pip would be equal to 0.0001.If you look at USD/JPY, you will notice it has only two decimal places 0.01; in cases like this the pip simply represents the last decimal place.
It’s time to open a demo account and start playing in your environment!
Now that you have a basic understanding of terminology in the forex market, it’s time to look into which broker you will choose.
I am not talking about a live account, simply a demo…or in my case…multiple brokers.
It is free to setup a demo account with the brokers of your choice and most usually fund with 10,000USD of play money
- Choosing Your Broker
Each broker has advantages & disadvantages in choosing them.
Things you will want to ask yourself in choosing a broker are:
- Are they regulated?
- Which country is the broker incorporated?
- Does the broker have live phone support 24 hours per day?
- Brokers I Prefer
I have multiple forex accounts with different brokers.
Oanda is my all time favorite, however their margin is 50:1, while Tradersway allows for a 500:1 margin. This was a nice feature when I had a smaller account size, so that I could build up my account and transfer my funds over to Oanda.
- Margin & Leverage
When a trader opens a position, they are required to put up a fraction of that position’s value ‘in good faith’.
This is referred to as being “leveraged” and the amount that is required to be put down is the “margin”.
Example: A 50:1 leverage ratio yields a margin percentage of 1/50 = 0.02 = 2%.
Alright, now it is time for some homework….
I’d like you to pick 1 or 2 brokers and setup demo accounts with them.
Download their MT4 software and in the next lesson we will get into how to use MT4
- RECAP… Questions
What are the 3 types of currency quotes?
Direct, Indirect and Cross Currency
The Cross Currency Quote is for what type of quote?
Any quote that does not include the USD
The Bid & Ask portion of a quote refers to what?
The bid is the buy and the ask is the sell in relation to the base currency
What is a Spread?
The difference between the bid and ask price
What is a pip?
A pip also referred to as a point, is the incremental change in a forex quote
What should you look for in a broker?
Regulation, location, live phone support 24 hour
Why do I suggest choosing a broker with larger margin?
If you have a smaller account, choosing a broker with a larger margin can help increase your account size, then withdraw the funds and then transfer into a regulated US broker (if you are a US citizen)
What homework do I expect to be complete for the next lesson?
I expect you to have 1-2 demo accounts setup with different brokers that you have researched. To install MT4 on your computer and be ready to learn!