The Sensible Guide to Forex: Safer, Smarter Ways to Survive and Prosper from the Start

CHAPTER 2

Forex Basics

This chapter covers:

• Basics of Currencies and Currency Pairs
• Currencies Trade in Pairs and Why That Matters
• Size Matters: Types of Currency Pairs
• Pips—The Universal Currency of Currencies
• Leverage and Margin: Their Relationship and Impact on Risk
• The Three Facets of Risk and Risk Control
• The Core Four: The Most Important Skills for Success

BASICS OF CURRENCIES AND CURRENCY PAIRS

Here we are going to cover only what you really need to know about currency pairs in order to understand the material that follows. At some point, perhaps even before you proceed to the next chapter, you'll want to know more and can search the Internet to explore answers to such questions as:

• What are the unique aspects of a given currency or pair?
• What news is most important for a given currency or pair?
• When is the best time to trade a given currency or pair?
• What currencies or pairs do better in which situations?
• What's carry trade and how do you use it to earn steady income?
• How are currency markets changing and what do I need to know about that?

Trade Only the Most Liquid Currencies

Though most currencies are convertible and tradable, most traders stick to the eight major currencies (known as majors) because they have the most liquidity or availability, meaning that lots of buyers and sellers are usually present at any given time That means you're likely to get the best price and avoid slippage (discussed in Chapter 1).

For example, if you want to buy or sell something, ...