The Elements of a Forex Deal

The Elements of a Forex Deal

If we are to do business in the foreign exchange market we ought to be familiar with the ins and outs of Forex deals. Here are some items we need to cover when we need to conduct a forex deal.

When we conduct a forex deal we are actually entering into an agreement or a contract. That agreement or the contract involves the client (i.e. you, or otherwise known as the forex trader) and your market maker (otherwise known as your trading platform or the company you signed up with to do trade). Every trading company would have its own house rules and may oblige you with different requirements.

We'll be discussing the items that most companies would require when making a forex deal. First stop will be your forex deal. Your forex deal would be executed at the Bid Price or Ask Price. The Ask Price is the price of the currency you would like to trade with and it is in the lowest price that would be acceptable to you - this will be offered to you by the company you desired to transact with. While the Bid Price is a value or price of the currency you yourself would offer to buy the currency desired for trade. It will therefore be the highest price you can offer for a certain currency for trade. The difference between the Ask Price and the Bid Price is called a Spread.

That having been said, you the trader have the right to accept or decline these price offers in a forex deal. This is may be called the haggling part. Remember that you will be trading using currency pairs (an example of which is EUR/USD, which stands for Euros to US dollars).

In a currency pair the first currency (in our example its EUR for euros) is called the base currency. This will be the currency you will be buying in a forex deal. Currently the EUR is the today's dominant currency (though it may still change). The other base currencies in order of dominance in today's market are as follows: Pound sterling, Australian dollar, New Zealand dollar, USD, Canadian dollar, Swiss franc, and the Japanese Yen.

The second currency in your currency pair is called the quote currency or counter currency. Generally speaking this is the currency you will sell in. If the price of the base currency goes up you generally would sell and it would be sold in your counter currency.

Your forex deal will also involve Stop Loss Orders. This is a tool to help you avoid a excessive loss. It is given should a currency (e.g. your base) would weaken and reach a specified percentage (you may get to specify what rate) that a short position will be covered (i.e. you'd be bailed out to save you from incurring further losses).

A forex deal will also require a Take-Profit Order. This would specify the ceiling rate where you would like to close out on a position to get a profit. This will take effect when the exchange rate moves in a favorable direction - in other words you're making money. This is important when the price begins to rise at certain levels but you're not sure what will be the next market behavior after the price reaches a certain level. This helps you maximize profits to a certain point (another fail safe just in case conditions change abruptly and make you incur losses).

Forex deals will involve other items but these are the most common items you will likely be paying attention to. Take time to talk to a broker to discuss their company's other items.