I am going through preschool and have so far scored either perfect scores on the quizzes or gotten one or two wrong. Great. As embarrassing as it is, I am not understanding the philosophy of base currency and quote currency. I have spent all day on it. How can I understand, besides the examples given, on when to buy or sell.
But after spending all day on this and finally getting frustrated, I am reaching out for help.
An explanation of how of I think I understand this goes like this.
Yesterday, USD/CAN was at 1.2925 the ask was 1.2925 as well (give or take, I don’t remember the exact number). Today the ask is 1.2990. Following the examples in the preschool because the base is the US dollar and the CAN dollar was weak I would buy. Today, given that the Canadian dollar is stronger and the US dollar will likely lose steam it is a sell. The problem I see is that I am treating this quote like stock which it is not. I think I am not connecting the US dollar to the fluctuating CAN dollar( or rather comparing it). I am going straight to buy low, sell high.
If someone can correct my thought process, I will be greatful.
Also, I am greatful for everyone who put the effort in in creating this site and building it up so well. This is unbelievable.
Your forex education is still in its infancy, don’t overworry about this. As you progress thru the school, things will slot into place. Im guessing you have a demo account, good idea while you study.
Regarding your UsdCad, the bid and ask wouldn’t have been the same, there will always be the brokers spread shown. The spread widens as we approach the weekend as trading volume drops. When they reopen Monday morning in Asia, the spreads will narrow again gradually as volume picks up…
I’ll take a shot at addressing your questions, although I’m not totally sure about what’s confusing you.
Let’s start by listing the things which you seem to understand.
[B]1.[/B] A currency pair relates two currencies to each other. The pair is written like a ratio or fraction (that is, ABC/XYZ) in which the first currency (ABC) is called the base currency, and the second currency (XYZ) is called the quote currency (or the cross currency).
[B]2.[/B] In the spot forex market, we speculate on the value (price) of the pair, not on the value of the individual currencies making up that pair. In this sense, a currency pair can be thought of as a single “thing”, an entity, or more properly a single financial instrument.
If the pair is rising in price, or if we anticipate that it [I]will[/I] rise in price, we might choose to “buy” the pair (sloppy terminology, which we will discuss in a moment). We are not “buying” the base currency, and “selling” the quote currency, even though many sources (including the Babypips School of Pipsology) say that’s exactly what we are doing. To be correct about it, we are going LONG the pair.
In the spot forex market, there is no buying or selling of anything. There is only speculating on the future price direction of currency pairs — going LONG (what we carelessly call “buying”) if we anticipate a rise in the price of the pair, or going SHORT (what we carelessly call “selling”) if we anticipate a decline in the price of the pair.
[B]3.[/B] The price referred to above is the price of the base currency in terms of the quote currency.
Let’s use the USD/CAD pair, instead of the generic ABC/XYZ pair, for the rest of this discussion.
If USD/CAD = 1.3000, it simply means that one U.S. dollar is worth (costs) 1.3000 Canadian dollars.
That is, one USD = 1.3000 CAD. Or $1.00 = C$1.30
[B]4.[/B] Prices are driven by fundamental factors and technical factors. Let’s focus on fundamentals, for the moment. All of the fundamentals which can drive the price of USD/CAD one way or the other (either up or down) can be grouped into two categories: fundamentals which are positive (bullish) for the pair, and fundamentals which are negative (bearish) for the pair.
Fundamentals which are [I]bullish for the USD/CAD pair[/I] can be grouped into two sub-categories: those fundamentals which are [I]bullish for the individual currency USD,[/I] and those fundamentals which are [I]bearish for the individual currency CAD.[/I]
Alternatively, fundamentals which are [I]bearish for the USD/CAD pair[/I] can be grouped into two sub-categories: those fundamentals which are [I]bearish for the individual currency USD,[/I] and those fundamentals which are [I]bullish for the individual currency CAD.[/I]
At any given time, some (or all) of the fundamentals in the sub-categories above can be in play. The combined effect of all of the fundamentals in play will determine whether the USD/CAD moves up in price, moves down in price, or remains stuck at its current level.
All of the above is a re-cap of what I think (hope) you already understand.
If I’m understanding what you’re saying, you think it’s a problem that you are treating the USD/CAD pair as [I]a single thing[/I] (like a stock), rather than as two related things — the USD, and the CAD. As I mentioned in #2 above, it’s entirely appropriate to think of a currency pair as one “thing” — a thing which moves up and down, driven by fundamental and technical factors — a thing which we can “buy” if we think it will go up in price, or “sell” if we think it will go down in price. Looked at this way, it is very much like a stock, or any other “thing” that can be traded.
All tradable instruments have drivers. The combined effect of all the drivers pushing a stock upward or downward will determine whether the stock moves up or down, or doesn’t move at all. In similar fashion, the combined effect of all the drivers pushing a currency pair upward or downward will determine the direction of the pair.
A final thought: All of the above discussion focused on fundamentals only. But, technicals also drive prices. It’s generally true that fundamentals drive long-term price trends, and technicals drive short-term price fluctuations.
Most traders consider both fundamental and technical drivers. The difference between so-called fundamental traders and so-called technical traders is simply where they place most of their emphasis. A fundamental trader might concentrate 90% on fundamentals and 10% on technicals, and a technical trader might reverse those percentages.
My perception is that fundamentals drive a currency pair [I]indirectly[/I] (over the longer term) by driving one, or the other, of the currencies comprising that pair.
By contrast, technicals drive a currency pair [I]directly,[/I] albeit over the short term.
OMG. I am elated that you would respond with such a thorough response. Thank you so much.
1.I have actually downloaded the Netdania app. I wont be using the Netstation because apparently there is a charge and it is not meant for single users. I have downloaded FXCM and have decided to focus on USD/CAN and USD/CHF.
I am feeling really positive about this becuase even now, I am prepping myself for risk management. I would like to know more about all the Forex traders documenting that a stop loss does not guarantee losing all your money and account. Because I am still in preschool I expect this to answer itself.
I think everyone has their way of approaching terminology. In the explanation regarding fundamentals and technicals as well as considering longing and shorting a stock, my thinking was ok. It is possible that I might need to become more specific with regards to buying and selling conceptually, but since you are writing that it is entirely appropriate to consider both as one, almost using the US dollar as a “fulcrum”, I can get by. I totally lack creativity and ingenuity as a person and might be overreading this issue.