Understanding the Exchange Rate

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An easy way to understand the exchange rate is to think of the base currency as the number one. For instance, assume that the exchange rate for the EUR/USD pair is 1.2904. Since the base currency is Euro, that is also the first member of the pair. Thinking of Euro as the number one will only mean that one Euro would be worth approximately $1.29 U.S. dollars.

But how do these movements in the exchange rates translate to the Forex traders bottom line? With trading a pair, like the EUR/USD, the U.S.-based trader will note that the pair has a fixed value of $10 per pip. This is also true for all pairs that have USD as the second currency. Hence, in any currency pair containing USD as the second currency, a flattering movement in the exchange rate of 10 pips will make a gain of $100; unfavorable movement of 10 pips would cause a loss of $100. In the case of the EUR/USD pair, a gain or loss of 10 pips can happen easily since the pair moves about 100 pips each day on average.

A non-trader or a beginner can get easily confused around traders, since they mostly use their own language. This kind of language is easily synonymous to a secret handshake, which would let others know that they are a member of the group.

First trading terminology is going long. Whenever you hear this come out of a traders mouth, it only means that he or she is placing a trade that will only be profitable if there is an evident rise in the exchange rate. selling short, on the other hand, means that the trader will be placing a trade that will only be profitable if the exchange rate falls. Flat means that the trade is neither long nor short. More so, the trader saying this has no open positions in the market.

Another trading term is the pip. By definition, the pip is the smallest increment of price in Forex markets. It is also an acronym for the phrase percentage in point. An example for this term would be when supposing the exchange rate for a pair rises from 1.1000 to 1.1001. It is safe to say that the rate rose by one pip.

Included within the trading terminologies are the major currencies, such as: EUR for Euro, GBP for Great Britain pound, JPY for Japanese yen, USD for U.S. dollar, CAD for Canadian dollar, CHF for Swiss franc, AUD for Australian dollar and NZD for New Zealand dollar.

Nicknames are also used in trading. These are slang terms that several traders like to use. Several examples of these nicknames are: cable or sterling for the British pound, greenback or buck for the U.S. dollar, single currency for the Euro, Swissy for the Swiss franc, kiwi for the New Zealand dollar, loonie for the Canadian dollar, and Aussie for the Australian dollar.
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