Trading Currencies Signals are Reversed
Posted by Dave Nettles on November 13, 2008 under Forex Currency | 
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The Signals are Reversed
Making trading currencies a little different at the time of buying the cross currency or USD in the GBP/USD pair, the signals are reversed. This will result in reduction of the currency pair price. As the seller, your interest is in a decrease in the price of the currency pair you sold, so that you are able to make a profit when you buy them back.
You have to calculate the number of pips you earn in a short trade as the same as those you would earn in a long trade. What is a pip? Pip stands for "percentage in point" and is the smallest increment of trade in the foreign exchange. It is not the purchase or sale price that matters; you must figure the difference between the higher number and the lower currency to get the gain.
How is the Foreign Exchange Different?
The foreign exchange market is different from other markets in some ways that will confuse you. Think that the GBP/USD is going to come crashing down? It is acceptable to short the pair at whenever you like. It is not the uptick rule in the foreign exchange like there is in stocks. You do not have limits on the size of your position (like there are in futures markets); so, you can sell $100 billion worth of currency if you had the capital to do so. If your biggest client, who also happens to play golf with the leader of the banking industry, tells you on the golf course that they are planning on raising their rates at their next meeting, you could go buy as much currency as you like. You would never get in trouble for insider trading by speculating your bet would pay off. Insider trading does not exist in the foreign exchange market.
Difference Between Bid and Ask
You will find the ask prices always exceed bid prices. The arbitrage or difference in the price is called the spread. The arbitrage is what the broker will earn as his commission. Brokers make their money based on the volume of trades accomplished and not through individual large commissions so no need to hustle you for a sale.
Why is the Spread so Competitive?
The reason for this because the smaller the spread, the more money you can make. It is a tactic used by brokers; they try to keep their spreads small to attract more customers. The commonly traded currency pairs are usually smaller than some of the others. Trading the commonly traded pairs is what is known as “Sticking with the majors.” These are the majors:
- EUR/USD (euro/dollar)
- USD/JPY (dollar/Japanese yen)
- GBP/USD (British pound/dollar)
- USD/CHF (dollar/Swiss franc)
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