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Trading techniques in the Forex market

To fully understand the following examples of trading procedures, you need to familiarize yourself with specific jargon, acronyms, and terminology, accepted in the Forex market.

First and foremost, the following acronyms are used to signify the most heavily traded currencies:

  • USD — United States dollar
  • EUR — Eurozone euro
  • JPY — Japanese yen
  • GBP — British pound sterling
  • CHF — Swiss franc
  • CAD — Canadian dollar
  • AUD — Australian dollar
  • NZD — New Zealand dollar

The currency pair ‘US dollar versus Japanese yen’ is expressed as USDJPY, or USD/JPY. The first currency of a currency pair is called the “base currency”. There exist other currency pairs, such as EURUSD, GBPUSD, USDCHF, etc.

Trades are executed in standard volumes called lots, with one lot usually equalling 100,000 units of the base currency. In other words, you will be able to buy and sell 100,000 units, 200,000 units, 300,000 units, etc.


Example 1

Let’s assume, you have decided the US economy has been badly weakened by policies pursued by the Republican administration, and its growth rates are bound to decline, which in turn suggests that the euro will most likely strengthen against the US dollar. You have decided to buy euros for dollars, i.e. you have decided to trade the EURUSD pair and, thus, you are executing a purchase order. The spot price is equal to, say, 1.1256. Therefore, by executing this purchase order, you are buying 100,000 euros (a standard lot) for US dollars at 1.1256 euros per dollar. With the passage of time, your expectations prove correct, and the euro exchange rate increases to 1.1834. You decide to lock in profits. By executing a sell order, you sell 100,000 euros for US dollars at 1.1834 euros per dollar. It is not difficult to calculate that your profit, generated from this trading operation, totals 100,000 õ (1.1834 - 1.1256) = USD 5,780.


Example 2

In your opinion, the Swiss franc is undervalued and it would be profitable to buy it for US dollars. Therefore, you are trading the USDCHF pair and selling US dollars for Swiss francs. Let’s assume the exchange rate was equal to 1.3100 Swiss francs per US dollar, as of the transaction date. However, your forecasts proved erroneous, and the price started climbing up. Let’s assume, the USD exchange rate against the Swiss franc rose to 1.3200. Seeking to limit your losses, you decide to close your position. You purchase US dollars for Swiss franc at the current price. That said, your loss totaled 100,000 (1.3100 - 1.3200) = CHF 1000, which is equal to approx. USD 757.58, given the current exchange rate of 1.3200.