The currency market has its own set of market trading conventions and related lingo, just like any financial market. If you’re new to currency trading, the mechanics and terminology may take some getting used to. But at the end of the day, most currency trade conventions are pretty straightforward.
Buying and Selling Simultaneously
The biggest mental hurdle facing newcomers to currencies, especially traders familiar with other markets, is getting their head around the idea that each currency trade consists of a simultaneous purchase and sale. In the stock market, for instance, if you buy 100 shares of Google, you own 100 shares and hope to see the price go up. When you want to exit that position, you simply sell what you bought earlier. Easy, right?
But in currencies, the purchase of one currency involves the simultaneous sale of another currency. This is the exchange in foreign exchange. To put it another way, if you’re looking for the dollar to go higher, the question is “Higher against what?”
The answer is another currency. In relative terms, if the dollar goes up against another currency, that other currency also has gone down against the dollar. To think of it in stockmarket terms, when you buy a stock, you’re selling cash, and when you sell a stock, you’re buying cash.
Currencies come in pairs
To make matters easier, forex markets refer to trading currencies by pairs, with names that combine the two different currencies being traded, or “exchanged,” against each other. Additionally, forex markets have given most currency pairs nicknames or abbreviations, which reference the pair and not necessarily the individual currencies involved.
Buying and Selling Simultaneously
The biggest mental hurdle facing newcomers to currencies, especially traders familiar with other markets, is getting their head around the idea that each currency trade consists of a simultaneous purchase and sale. In the stock market, for instance, if you buy 100 shares of Google, you own 100 shares and hope to see the price go up. When you want to exit that position, you simply sell what you bought earlier. Easy, right?
But in currencies, the purchase of one currency involves the simultaneous sale of another currency. This is the exchange in foreign exchange. To put it another way, if you’re looking for the dollar to go higher, the question is “Higher against what?”
The answer is another currency. In relative terms, if the dollar goes up against another currency, that other currency also has gone down against the dollar. To think of it in stockmarket terms, when you buy a stock, you’re selling cash, and when you sell a stock, you’re buying cash.
Currencies come in pairs
To make matters easier, forex markets refer to trading currencies by pairs, with names that combine the two different currencies being traded, or “exchanged,” against each other. Additionally, forex markets have given most currency pairs nicknames or abbreviations, which reference the pair and not necessarily the individual currencies involved.
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