part 3

LESSON #3:

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How Currencies Are Traded, Understanding
FOREX Quotes, Market Structure And How to
Love a *pip* -- soon to be your best friend!
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Before I get into how currencies are traded, quoted and
structured, let me tell you about one of the best advantages
of FOREX Trading.


The amount of money you need to place a trade (known as
"margin") is all that can be lost !


I state it like this (in a glass-is-half-empty, negatively-
presumptive kind of way) because, even though I know with
proper self-taught education you're NOT going to lose as
much as you win anyway, I want you to know that despite the
super-high leverage associated with FOREX trading (200:1 is
possible; meaning if you put up $1 the trading vendor will
allow you to trade like you really have $200), it's still
arguably less risky than futures (commodities) trading.


(And, forget stocks, you'll never get this type of LEVERAGE
in the equities market)


Futures markets are often prone to sudden and dramatic
moves, against which you can't protect yourself, even by
trading with protective stops. Your position may be
liquidated at a loss, and you'll be liable for any
resultingdeficit in the account. But because of the FX
market's deep liquidity and 24-hour, continuous trading,
dangerous trading gaps and limit moves are eliminated.
Orders are executed quickly, without slippage or partial
fills. And finally, there are no margin calls -- for your
protection, ALL our recommended brokers will automatically
close out some or all of your open positions if your account
equity falls below the level required to hold the positions.
Think of this as a final, automatic stop, always working on
your behalf to prevent a debit balance. In fact, if you pick
from our list of recommended brokers, you'll never lose more
than you have in your FOREX account!


=====================

Currencies are traded in dollar amounts called *lots* -- One
lot is equal to $1,000, which controls $100,000 in currency.
This is the "margin" I talked about above. Control $100,000
worth of currency for only 1,000 doll_ars.
Good stuff, right?


Okay, let's move on....


Currencies are always traded in pairs in the FOREX. The
pairs have a unique notation that expresses what currencies
are being traded. The symbol for a currency pair will always
be in the form ABC/DEF. ABC/DEF is not a real currency pair,
it is an example of a symbol for a currency pair. In this
example ABC is the symbol for one countries currency and DEF
is the symbol for another countries currency.


Here are some of the common symbols used in the Forex:


USD - The US Dollar
EUR - The currency of the European Union "EURO"
GBP - The British Pound
JPN - The Japanese Yen
CHF - The Swiss Franc
AUD - The Australian Dollar
CAD - The Canadian Dollar

There are symbols for other currencies as well, but these
are the most commonly traded ones.


A currency can never be traded by itself. So you can't ever
trade a EUR by itself. You always need to compare one
currency with another currency to make a trade possible.

Some of the common PAIRS are:


EUR/USD Euro / US Dollar
"Euro"

USD/JPY US Dollar / Japanese Yen
"Dollar Yen"

GBP/USD British Pound / US Dollar
"Cable"

USD/CAD US Dollar / Canadian Dollar
"Dollar Canada"

AUD/USD Australian Dollar/US Dollar
"Aussie Dollar"

USD/CHF US Dollar / Swiss Franc
"Swissy"

EUR/JPY Euro / Japanese Yen
"Euro Yen"


The listed currency pairs above look like a fraction. The
numerator (top of the fraction or "left" of the / however
you want to SEE it) is called the base currency. The
denominator (bottom of the fraction or "right" of the
/however you want to SEE it) is called the counter currency.
When you place an order to buy the EUR/USD, for instance,
you are actually buying the EUR and selling the USD. If you
were to sell the pair, you would be selling the EUR and
buying the USD. So if you buy or sell a currency PAIR, you
are buying/selling the base currency. You are always doing
the opposite of what you did to base currency with the
counter currency.


If this seems confusing then you're in luck. You can always
get by with just thinking of the entire pair as one item.
Then you are just buying or selling that one item. Thinking
like this will still enable you to place trades. You only
need to be aware of the base/counter concept for Fundamental
Analysis issues.


So why is it important to know about the base/counter
currency now? The base/counter currency concept illustrates
what is actually taking place in a Forex transaction. Some
of you reading this, know that short-selling was restricted
in the stock market *(Short-selling is where you sell a
stock/currency/option/commodity first and then try to buy it
back at a lower price later). But in the FOREX you are
always buying one currency (base) and selling another
(counter). If you sell the pair you are simply flipping
which one you buy and which one you sell. The transaction is
essentially the same. This allows you to short-sell with no
restrictions!


You want to be able to short-sell with no restrictions so
you can make money when the market drops as well as when it
rises. The problem with traditional stock market trading is
that the market has to go up for you to make money. With
FOREX trading you can make money in all directions.



=======================
Love Your *pips*
=======================



Currencies are traded on a price interest point (pip)
system. Each currency pair has its own pip value.

Since we have a listed currency PAIR (i.e., EUR/USD,
EUR/AUD), we need a way to talk about its associated number
or price. When you see a FOREX price quote, you'll see
something listed like this:


<< USD/JPY: 118:46/51 >>


The first component (before the slash) refers to the bid
price (what you obtain in JPY when you sell USD). In this
example, the bid price is 118.46. The second component
(after the slash) is used to obtain the ask price (what you
have to pay in JPY if you buy USD). In this example, the ask
price is 118.51. The difference between the bid and the ask
price is referred to as the spread (how brokers REALLY allow
you to trade commission-free). In the example above, the
spread is .05 or 5 pips.


Sometimes you won't see a two-sided quote, consisting of a
'bid' and 'offer'. But, rather, you'll see something like...


<< USD/JPY: 123.50 >>


When you see a Forex currency pair price quote, like the one
above, just remember that that last digit of the price is
referred to as the *pip*. So if you see a quote (123.50)
and then a qu.ote in one minute of (123.51), the price rose 1 pip.
Similarly, if you see a price quote of 187.50 and then
after 5 minutes it's (187.58), the price rose 8 pips. The pip is
always the last decimal place of the currency price quote.


YOUR GOAL IS TO CAPTURE AS MANY PROFITABLE pips AS POSSIBLE!


Since the US dollar is the centerpiece of the FOREX market,
it is normally considered the 'base' currency for quotes. In
the "Majors", this includes USD/JPY, USD/CHF and USD/CAD.
For these currencies and many others, quotes are expressed
as a unit of $1 USD per the second currency quoted in the
pair.


In the example above, a quote of USD/JPY 123.50 means that
one U.S. dollar is equal to 123.50 Japanese yen.


When the U.S. dollar is the base unit and a currency quote
goes up, it means the dollar has appreciated in value and
the other currency has weakened. If the USD/JPY quote above
increases to 124.01, the dollar is stronger because it will
now buy more yen than before.


The three exceptions to this rule are the British pound
(GBP), the Australian dollar (AUD) and the Euro (EUR). In
these cases, you might see a quote such as GBP/USD 1.4366,
meaning that one British pound equals 1.4366 U.S. dollars.


In these three currency pairs, where the U.S. dollar is not
the base rate, a rising quote means a weakening dollar, as
it now takes more U.S. dollars to equal one pound, euro or
Australian dollar.


In other words, if a currency quote goes higher, that
increases the value of the base currency. A lower quote
means the base currency is weakening.


Currency pairs that do not involve the U.S. dollar are
called cross currencies, but the premise is the same. For
example, a quote of EUR/JPY 127.95 signifies that one Euro
is equal to 127.95 Japanese yen.


====================


So, now that you're fully indoctrinated into how to read
currency quotes, let us remind you one on thing:


YOUR GOAL IS TO CAPTURE AS MANY PROFITABLE pips AS POSSIBLE!


Oh yeah ... that was already mentioned, wasn't it? :-)


The point: never lose sight of your objective. While the
above lesson could go on and on for pages, it still wouldn't
make you a world-class FOREX trader.


But, the combined power of our remaining lessons, just might.