Foreign Currency Trading

By: Mel Joelle

To the uninitiated, trying to read a currency trading chart is confusing at best. There are prices for each of the offerings, but what do they all mean? That is probably the hardest part for a beginner, but it really isn’t all that difficult once the right method is learned. This makes understanding and being able to profit from the Forex (Foreign Exchange) markets much easier to accomplish.

The actual currency trading rates are calculated by a simple formula in order to sort out the exchange. It basically comes down to a simple ratio: exchange rate of currency A to B is equal to the inverse rate of B to A. This means for example that trying to compare US Dollars (USD) to Euros is not the same as comparing Euros to US Dollars. Taken as a real world example, if a single Euro is equal to 1.25 US Dollars, one US Dollar would be equal to 0.80 Euros.

It is simply the inverse number of the first calculation that makes it easier for some people to grasp this thinking, but others may need a new way to convolute the logic here. It can be accurately stated that conversion in the Forex market is similar to that between the English measurement system and the SI units. One inch here is 2.54 cm, but one cm is 0.39 inches.

Once the exchange rate is understood, it is important to be able to read trading charts. The market uses columns with the same basic structure. The first one designates the currencies country and uses a 3 letter code. The United States dollar would have a USD in this space. The second column has the name of the country and the currency. Each of the remaining columns shows the differences between the desired (or base) currency and those of other countries.

This allows a speculator to look at the currency under observation for a possible trade against all of the others to evaluate the best possible trade at this time. By looking at the chart, it is easy to find the base currency and then compare it to the rest of the offerings. The basic trade simply involves the comparison between two different currencies.

A more advanced model involves the Arbitrage method where a speculator may line up multiple currency types and figure out whether there is a profit to be made from the differences in the exchange rates. A three way deal may involve the Canadian Dollar (CAD), the US Dollar (USD) and the Argentinean Peso (ARP). The initial deal will be to sell 10 USD and get 13.659 CAD. The CAD is then sold to obtain 29.45 ARP. The pesos are then sold to buy USD which is worth ten dollars.

This is how an arbitrage can be done, and although it didn’t make a profit this time, it is relatively easy to do. The key for the expert investor is to catch the market in a period of volatility. There can be huge profits obtained via this simple strategy. Forex trading can be a lucrative business once the method of learning how to read charts becomes much clearer. To find out more about foreign currency trading visit Lucror FX today!

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