Three Important Forex Concepts For New Traders

As you enter the world of Forex you will find yourself learning and using many new concepts that you may not have used or heard before.

Three of this important concepts that you must understand are what “Pips” are, What “Volume” is and what you do when “Buying” and “Selling Short”. They may look more like four concepts but Buying and Selling are like the two faces on the same coin so we can consider them as a single concept.

Lets first introduce what Pips are. Maybe you have heard or read already how many pips a day you can make using some trading system. In short, currency pairs prices will go out to 4 significant digits. For example; if one currency pair is trading for 1.3451 then an increase to 1.3452 would be a “one-pip” increase in the price of this particular currency. This is an increase of one hundredth of a percent of the value of the currency pair you are trading. And depending the type of account you have, regular or mini, each pip will have a value of $10 or $1. So if you make 10 pips a day with a regular account you would have made $100 and with a mini-account $10.

Now we can talk about the Volume; trading Volume is a quantity that tells traders how much money is being traded at one particular moment. And the forex market is known by its high volume of trading during most of the time markets are open. Some times there can be spikes in the volume during some type of news breaks and during the time New York stock exchange is open. The volume of transactions in Forex, even in a slow day, will always be much higher than the volume traded in other large exchanges at their full capacity.

Now maybe the most obvious of the concepts. Buying refers to the acquisition of a particular currency pair to open a trade. Selling short refers to the selling of a particular currency to open a trade. When you Buy, you are expecting the price of the currency pair to increase with time, i.e., you buy cheap to sell high. In the case of Selling short, it looks a bit more complicated. Here the way to make money is to initially sell a currency pair that you think will lose value in a given period of time and then, once it happened, you will buy it back at the new price but now you can sell it at the previous greater price the currency had when you opened the trade, so you earn the difference in prices. I know it seems kind of tricky, but once you are in front of your trading station it will look much simpler.

Eurobonds Are Not Only For The Europeans

What exactly is a Eurobond? Well, it's a bond which is issued as well as traded in a different country from the one where its currency is denominated. The funny thing is that a Eurobond does not necessarily have to originate or circulate only in Europe. Most Eurobonds however, are issued for trade by investors in Europe.

Now this can get quite creative. You could have a Eurobond denominated in US dollars but an Australian company can issue them in Japan. Or you could have the French issuing these bonds that are traded in Japanese markets. Look at Wal-Mart for example. They issue these bonds which are denominated in US dollars but sell in the exchanges in Germany! What's more, the Iran government floats them too.

In the international bond market, you'll find that most of the new issues are in Eurobonds and these add up to being larger than the $14 trillion US bond market. The thing is that there is a lot of scope for creative financing with Eurobonds and one can choose a country after looking at the regulations as well as the tax environment there.

All this of course does not get rid of the element of risk which Eurobonds come with. Let's face it - one is more familiar with all the laws and regulations in one's own country than elsewhere. Even though one is privy to so much more information and news thanks to the Internet, there's still a lot that one is not fully aware of. There is bound to be a certain degree of ignorance about the way things work in a far-off country, about the implications of the written word and events that don't really come out in the news. What happens so far away could in a way constitute a risk if one is not fully aware of the whole picture.

The other thing is the sensitivity of foreign currency trading. While bond trade in the international markets is fairly small, the foreign currency trading is huge and is definitely more volatile and currency risk is something one has to contend with when one is in the international financial arena. There are price swings that can be quite huge and there is a sensitivity in many countries to the political climate and the changes that take place.

Let's look at an example. If an investor in the US pays 1170 at today's exchange rates of 1 GBP = $1.77USD for a 1000 Eurobond and the maturity date was 5 years later, when he gets his money back, let's assume that the exchange rate has dropped to 1 = $1.66. He will get paid back in GBP because that is the currency of the bond. However, when it gets converted to dollars, he will only get $1,660 and not $1.77USD which is the least he would have expected when he bought the bond. Now this is the loss that arises because of currency risk. If it were the other way and the dollar went down, he would get much more than he expected.

This is why it's a risky market but there are people who make their millions there. What helps is a lot of research and one needs to have the big picture of past performances as well as current patterns to be able to predict reasonable returns with any degree of accuracy. If you do get adept at it, the fact that there is so much of global news and views on the Internet can only work to your advantage.