The US Dollar - $USD
(The US dollar is also referred to as the Dollar, Greenback and Buck.)
The US dollar was adopted by the Congress of the Confederation of the United States
on July 6, 1785 and is the most used in international transactions. Several countries
use the US dollar as their official currency, and many others allow it to be used
in a de facto capacity.
In 1995, over US$380 billion were in circulation, of which two-thirds was outside
the United States. By 2005, those figures had doubled to nearly $760 billion with
an estimated half to two-thirds being held overseas, which is an annual growth of
about 7.6%. However, as of December 2006, the dollar was surpassed by the euro in
terms of combined value of cash in circulation. The value of euro notes in circulation
has risen to more than € 610 billion, equivalent to US$800 billion at the exchange
rates at this time.
The US dollar uses the decimal system, consisting of 100 (equal) cents (symbol ¢).
The Euro - €
The euro (currency sign: €; banking code: EUR) is the official currency of the European
states of The EU - also known as the Euro zone - and is the single currency for
more than 317 million people in Europe.
Including areas using currencies pegged to the euro, the euro affects more than
480 million people worldwide, with more than €610 billion in circulation as of December
2006. While all EU member states are eligible to join if they comply with certain
monetary requirements, the euro is not used in all of the European Union as not
all EU members have adopted the currency. All nations which have recently joined
the EU are pledged to adopt the euro in due course, but the United Kingdom and Denmark
are under no such obligation. Several small European states, like the Vatican, Monaco
and San Marino, although not EU members, have adopted the euro due to currency unions
with member states. Andorra, Montenegro and Kosovo have adopted the euro unilaterally.
The Yen - ¥
The yen or (Japanese yen) is the currency of Japan. It is also widely used as a
reserve currency after the United States dollar and euro.
History of the Yen
Introduction
The yen was introduced by the Meiji government in 1870 as a system resembling those
in Europe. The yen replaced the complex monetary system of the Edo period, based
on the mon.
The mon was a currency of Japan until 1870, as there were hundreds of different
styles of currency throughout Japanese history, of many shapes, styles, designs,
sizes, and materials, including gold, silver, bronze, etc. Even rice was once a
currency, the koku.
The yen lost most of its value during and after World War II; after a period of
instability, the yen was pegged at 1 US dollar = ¥360 from April 25, 1949 until
1971, when the Bretton Woods system collapsed and the value of the yen began to
float. After the Plaza Accord of 1985, the yen appreciated against the US dollar,
until it reached a peak of about ¥85 per dollar in the mid 1990s. After that, the
Bank of Japan adopted a weak yen policy which has held it in the range of ¥100-120
per dollar. In the last couple of years, the yen has grown weaker and weaker against
not only the dollar but against nearly all other important world currencies due
to a de facto zero interest rate policy which has encouraged massive yen carry trades,
where speculators borrow in yen and buy bonds and other assets in currencies that
charge significant interest. This can be very profitable, but is a short position
on the yen, which in the absence of other factors drives the yen's value down.
Determinants of value
The relative value of the yen is determined in foreign exchange markets by the economic
forces of supply and demand. The supply of the yen in the market is governed by
the desire of yen holders to exchange their yen for other currencies to purchase
goods, services, and/or assets. The demand for the yen is dependant on the desire
of foreigners to buy goods and services in Japan, and by their interest in investing
in Japan (buying yen-denominated real and financial assets).
Fixed value of the Yen to the US Dollar
In 1949, the value of the yen was fixed at ¥360 per US$1 through a United States
plan, which was part of the Bretton Woods System, to stabilize prices in the Japanese
economy. That exchange rate was maintained until 1971, when the United States abandoned
the convertibility of the US dollar to gold, which had been a key element of the
Bretton Woods System, and imposed a 10 percent surcharge on imports, setting in
motion changes that eventually led to floating exchange rates in 1973.
An undervalued Yen
By 1971, the yen had become undervalued. Japanese exports were costing too little
in international markets, and imports from abroad were costing the Japanese too
much. This undervaluation was reflected in the current account balance, which had
risen from the deficits of the early 1960s to a then-large surplus of US$5.8 billion
in 1971. The belief that the yen, and several other major currencies, were undervalued
motivated the United States' actions in 1971.
The Yen and major currencies float
Following the United States' measures to devalue the US dollar in the summer of
1971, the Japanese government agreed to a new, fixed exchange rate as part of the
Smithsonian Agreement, signed at the end of the year. This agreement set the exchange
rate at ¥308 per US$1. However, the new fixed rates of the Smithsonian Agreement
were difficult to maintain in the face of supply and demand pressures in the Forex
market. In early 1973, the rates were abandoned, and the major nations of the world
allowed their currencies to float.
Japanese government intervention in the currency market
In the 1970s, Japanese government and business people alike were very concerned
that a rise in the value of the yen would hurt export growth by making Japanese
products less competitive and would damage the industrial base. Therefore, the government
continued to intervene heavily in Forex marketing (buying or selling dollars), even
after the 1973 decision to allow the yen to float.
Despite intervention, market pressures caused the yen to continue climbing in value,
peaking temporarily at an average of ¥271 per US$1 in 1973, before the impact of
the 1973 oil crisis was felt. The increased costs of imported oil caused the yen
to depreciate to a range of ¥290 to ¥300 between 1974 and 1976. The re-emergence
of trade surpluses drove the yen back up to ¥211 in 1978. Once again, this currency
strengthening was reversed by a second oil shock in 1979, when the yen dropped to
¥227 by 1980; the effect of the Plaza Accord.
In 1985, a dramatic change began. Finance officials from major nations signed an
agreement (The Plaza Accord) affirming that the dollar was overvalued (and, therefore,
the yen undervalued). This agreement, and shifting supply and demand pressures in
the markets, led to a rapid rise in the value of the yen. From its average of ¥239
per US$1 in 1985, the yen rose to a peak of ¥128 in 1988, virtually doubling its
value relative to the dollar. After declining somewhat in 1989 and 1990, it reached
a new high of ¥123 to US$1 in December 1992. In April 1995, the yen hit a peak of
under 80 yen per dollar, temporarily making Japan's economy nearly the size of the
US.
The yen's increased value made Japanese exports less price competitive and imports
more price competitive, which should have brought down the value of trade and current
account surpluses. The current account figures discussed earlier, however, indicated
that such a response was slow. The strong appreciation of the yen began in 1985,
but the current account continued to rise until 1987. Its decline in 1988 was rather
small, although it experienced a more substantial decline in 1989.
The Great British Pound - £
Other Names - Sterling, Cable and the Pound
The pound (symbol: £; ISO code: GBP), divided into 100 pence, is the official currency
of the United Kingdom and the Crown dependencies. The slang term "quid" is very
common in the UK.
The official full name, pound sterling (plural: pounds sterling), is used mainly
in formal contexts, and also when it is necessary to distinguish the currency used
within the United Kingdom from others that have the same name. The Sterling is the
third most traded currency in the world, after the US dollar and the euro.
History of the Great British Pound
The Gold Standard
Sterling unofficially moved to the gold standard from silver thanks to an overvaluation
of gold in England that drew gold from abroad and occasioned a steady export of
silver coin, in spite of a re-evaluation of gold in 1717 by Sir Isaac Newton, Master
of the Royal Mint. The de facto gold standard continued until its official adoption
following the end of the Napoleonic Wars, in 1816 (Braudel, p. 361). This lasted
until the United Kingdom, in common with many other countries, abandoned the standard
after World War I in 1919. During this period, one pound could be exchanged for
US$4.87.
Discussions took place following the 1865 International Monetary Conference in Paris
concerning the possibility of the UK joining the Latin Monetary Union, and a Royal
Commission on International Coinage examined the issues. Although the UK decided
against joining, some of the arguments make interesting reading in the context of
the current debate on the adoption of the euro.
Prior to World War I, the United Kingdom had one of the world's strongest economies,
holding 40% of the world's overseas investments. However, by the end of the war
the country owed £850 million, mostly to the United States, with interest costing
the country some 40% of all government spending.
In an attempt to resume stability, a variation on the gold standard was reintroduced
in 1925, under which the currency was pegged to the gold price at pre-war levels,
although people were only able to exchange their currency for gold bullion, rather
than for coins. This was abandoned on September 21, 1931, during the Great Depression,
and sterling suffered a devaluation of 20%.
In common with all other world currencies, there is no longer any link to precious
metals. The US dollar was the last to leave gold, in 1971. The pound was made fully
convertible in 1946 as a condition for receiving a United States loan of US$3.75
billion in the aftermath of World War II.
Pound sterling was used as the currency of many parts of the British Empire. As
this became the Commonwealth of Nations, commonwealth countries introduced their
own currencies such as the Australian pound and Irish pound. This evolved into the
Sterling Area where those currencies were pegged to sterling.
Following the US dollar
Since leaving gold, there have been several attempts to peg the value of the pound
to other currencies, initially, the US dollar.
Under continuing economic pressure, and despite months of denials that it would
do so, on September 19, 1949, the government devalued the pound by 30%, from US$4.03
to US$2.80. The move prompted several other governments to devalue against the dollar
too, including Australia, Denmark, Ireland, Egypt, India, Israel, New Zealand, Norway
and South Africa.
In the mid-1960s, the pound came under renewed pressure due to the exchange rate
against the dollar which was considered too high. In the summer of 1966, with the
value of the pound falling in the currency markets, exchange controls were tightened
by the Wilson government. Among the measures, tourists were banned from taking more
than £50 out of the country, until the restriction was lifted in 1970. The pound
was eventually devalued by 14.3% to US$2.41 on November 18, 1967.
With the breakdown of the Bretton Woods system - not least because mainly British
currency dealers had created a substantial Eurodollar market which made the US dollar's
gold standard harder for its government to maintain - the pound was floated in the
early 1970s and so became subject to a market appreciation. The Sterling Area effectively
ended at this time when the majority of its members also chose to float freely against
the pound and the dollar.
A further crisis followed in 1976, when it was apparently leaked that the International
Monetary Fund (IMF) thought that the pound should be set at US$1.50, and as a result
the pound fell to US$1.57, and the government decided it had to borrow £2.3 billion
from the IMF. In the early 1980s the pound moved above the US$2 level as interest
rates rose in response to the monetarist policy of targeting money supply and a
high exchange rate was widely blamed for the deep recession of 1981. At its lowest,
the pound stood at just US$1.05 in February 1985, before returning to US$1.77 during
the 1990s.
There are often long periods where the pound and the euro move in sync, although
since the middle of 2006 this correlation has weakened. Inflation concerns in the
UK led the Bank of England (BoE) to hike interest rates twice unexpectedly in late
2006 and early 2007, causing sterling to rise to its highest rate against the euro
since January 2003. This had a knock-on effect versus other major currencies, and
the pound hit a 15-year high against the US dollar on January 23, 2007, peaking
at US$1.9916 per pound.
Following the German Mark
In 1988, Margaret Thatcher's Chancellor of the Exchequer, Nigel Lawson, decided
that the pound should "shadow" the West German Deutsche Mark, with the unintended
result of a rapid rise in inflation as the economy boomed due to the inappropriately
low interest rates. (For ideological reasons, the Conservative Government declined
to use alternative mechanisms to control the explosion of credit. Former Prime Minister
Ted Heath referred to Lawson as a "one club golfer").
Following the European currency unit
In another change of tack, on October 8, 1990, the Thatcher government decided to
join the European Exchange Rate Mechanism (ERM), with the pound set at DM2.95. However,
the country was forced to withdraw from the system on Black Wednesday (September
16, 1992) as Britain's economic performance made the exchange rate unsustainable.
Speculator George Soros famously made approximately US$1 billion from shorting the
pound.
Black Wednesday saw interest rates jump from 10% to 12%, and then finally to 15%,
in a futile attempt to stop the pound from falling below the ERM limits. The exchange
rate fell to DM2.20. Proponents of a lower GBP/DM exchange rate were vindicated
as the cheaper pound encouraged exports and contributed to the economic prosperity
of the 1990s. Since early 2005, the £/€ rate has returned to an average of about
£1.00:€1.46, which is equivalent to DM2.85.
Bank Negara Malaysia is reported to have suffered losses of more than US$4 billion
from the pound devaluation.
Following inflation targets
In 1997, the newly-elected Labour government made a surprising move when Gordon
Brown handed over day-to-day control of interest rates to the Bank of England (a
policy that had initially been proposed by the Liberal Democrats). The Bank is now
responsible for setting its base rate of interest so as to keep inflation very close
to 2%. Should inflation be more than 1% above or below the target, the governor
of the Bank of England is required to write a letter to the Chancellor of the Exchequer
explaining the reasons for this and the measures which will be taken to bring inflation
back in line with the 2% target.
The Euro
As a member of the European Union, the United Kingdom has the option of adopting
the euro as its currency. However, the subject remains politically controversial,
not least since the United Kingdom was forced to withdraw from its precursor, the
European Exchange Rate Mechanism. The pound did not join the Second European Exchange
Rate Mechanism (ERM II) after the euro was created.
Denmark and the United Kingdom have a unique opt-out from entry to the euro. Technically,
every other EU nation must eventually sign up; however, this can be delayed indefinitely
(as in the case of Sweden) by refusing to join ERM II.
The idea of replacing the pound with the euro has been controversial with some sectors
of the British public because of its identity as a symbol of British nationalism.
In Scotland, there is additional concern that the adoption of the euro would mean
the end of regionally distinctive banknotes, as the European Central Bank does not
permit national or sub-national designs of the banknotes.
The Swiss Franc – CHF
The franc (ISO 4217: CHF or 756) is the currency and legal tender of Switzerland
and Liechtenstein. The Italian exclave Campione d'Italia and the German exclave
Büsingen also use the Swiss franc. Franc banknotes are issued by the central bank
of Switzerland, the Swiss National Bank, while coins are issued by the federal mint,
Swissmint.
The Swiss franc (German: Franken, French and Rhaeto-Romanic: Franc, and Italian:
Franco) is the only version of the franc still issued in Europe. The smaller denomination,
which is worth a hundredth of a franc, is called Rappen (Rp.) in German, centime
(c.) in French, centesimo (ct.) in Italian and rap (rp.) in Rhaeto-Romanic. Users
of the currency commonly write CHF (the ISO code), though SFr. is still common.
SwF has been used in some publications but is not an official abbreviation.
The current franc was introduced in 1850 at par with the French franc. It replaced
the different currencies of the Swiss cantons, some of which had been using a franc
(divided into 10 Batzen and 100 Rappen) which was worth 1½ French franc.
In 1865, France, Belgium, Italy, and Switzerland formed the Latin Monetary Union,
where they agreed to change their national currencies to a standard of 4.5 grams
of silver or 0.290322 grams of gold. Even after the monetary union faded away in
the 1920s and officially ended in 1927, the Swiss franc remained on that standard
until 1967.
As of November 30, 2006, the Swiss franc was worth US$0.826729 or €0.628625. Since
mid-2003, its exchange rate with the euro has been stable at a value of about 1.55
CHF per euro, so that the Swiss franc has risen and fallen in tandem with the euro
against the US dollar and other currencies.
The Swiss franc has historically been considered a safe haven currency with virtually
zero inflation, and a legal requirement that a minimum 40% is backed by gold reserves.
However, this link to gold, which dates from the 1920s, was terminated on May 1,
2000 following an amendment to the Swiss Constitution. The Swiss franc has suffered
devaluation only once, on September 27, 1936, during the Great Depression, when
the currency was devalued by 30% following the devaluations of the British pound,
US dollar and French franc.
The Australian Dollar
Since February 14, 1966, the Australian dollar (currency code AUD) has been the
currency of the Commonwealth of Australia, including Christmas Island, the Cocos
(Keeling) Islands, Norfolk Island, and the independent Pacific Island states of
Kiribati, Nauru and Tuvalu. It is normally abbreviated with the dollar sign $. Alternatively,
A$ or $A, $AU or AU$ is used to distinguish it from other dollar-denominated currencies.
It is sometimes affectionately called the "Aussie battler"; during a low period
(relative to the US dollar) around 2001 and 2002 the currency was sometimes locally
called the "Pacific Peso". It is divided into 100 cents.
The Australian dollar is currently the sixth-most-traded currency in world foreign
exchange markets (behind the US dollar, the euro, the yen, the pound sterling, and
the Swiss franc), accounting for approximately 4-5% of worldwide foreign exchange
transactions. The Australian dollar is popular with currency traders due to the
relative lack of government intervention in the foreign exchange market, the general
stability of the economy and government, as well as the prevailing view that it
offers diversification benefits in a portfolio containing the major world currencies
(especially because of its greater exposure to Asian economies and the commodities
cycle).
History of the Australian Dollar
The Australian dollar was introduced on February 14, 1966, not only replacing the
Australian pound (long since distinct from the pound sterling), but also introducing
a decimal system.
In 1965, the Prime Minister, Robert Menzies, wished to name the currency "the royal",
and other names such as "the austral", "the oz", "the boomer", "the roo", "the kanga",
"the emu", "the digger", "the kwid" and "ming" (the nickname of Menzies) were also
proposed. Due to Menzies' influence, the name "royal" was settled upon, and trial
designs were prepared and printed by the printing works of the Reserve Bank of Australia.
The unusual choice of name for the currency proved unpopular, and it was later shelved
in favour of "dollar".
On February 14, 1966, the Australian dollar was introduced at a rate of two dollars
per pound, or ten shillings per dollar.
In 1967, the Australian dollar effectively left the sterling area for the first
time. When sterling devalued in 1967 against the US dollar, the new Australian dollar
did not follow. It maintained its peg to the US dollar at the same rate.
Value of the Australian Dollar
In 2001, the value of one Australian dollar went below 50 US cents for the first
time. As of January 2007, the Australian dollar was worth 77 US cents.
In 1966, when the Australian dollar was introduced, the International gold standard
still operated. The Australian dollar was at that time worth 980 milligrams of gold.
As of December 2006, the Australian dollar was worth 38 milligrams of gold.
Australian Dollar – Exchange rate policies
Australia maintained a peg to the British pound reflecting its historical ties as
well as a view about the stability in value of the British pound. From 1946 to 1971,
Australia maintained a peg to the US dollar under the Bretton Woods system, but
it was effectively pegged to sterling until 1967. With the breakdown of the Bretton
Woods system in 1971, Australia converted the mostly-fixed peg to a moving peg against
the US dollar. In September 1974, Australia moved to a peg against a basket of currencies
called the TWI (trade weighted index) in an effort to reduce fluctuations associated
with its peg to the US dollar. The peg to the TWI was changed to a moving peg in
November 1976, causing the actual value of the peg to be periodically adjusted.
In December 1983, the Australian Labour government led by Prime Minister Bob Hawke
and Treasurer Paul Keating "floated" the Australian dollar. From that point, movements
in the Australian dollar continued to reflect the strength of its terms of trade.
For decades Australia's reliance upon commodity (mineral and farm) exports has seen
the Australian dollar rally during global booms, and fall when mineral prices slumped
or when domestic spending overshadowed its export earnings outlook. The currency's
high volatility, currency exposure and interest swap has made the AUD one of the
most traded currencies in the world, far in excess of the economy's importance (2%
of global economic activity).
How to Read Currency Quotes
The first thing you should know for correctly reading currency quotes is that each
world currency is given a three letter code which is used in Forex quotes. The most
common currencies for traders are: European euro (EUR), US dollar (USD), United
Kingdom pound (GBP), Australian dollar (AUD), Japanese yen (JPY), Swiss franc (CHF)
and Canadian dollar (CAD). Other important things to learn, is that the foreign
exchange prices when trading Forex are indicated by quotes in a fraction like mode,
called currency pairs. The first currency is called the 'base' and the second is
called the 'quote' currency. In the following example: EUR/USD = 1.3200
This currency pair is formed by European euros and US dollars. The base currency
(EUR) is always considered ‘1’ and the quote currency shows how much it costs to
buy one unit of the base currency. In this example, 1 European euro costs 1.32 US
dollars.
What Is A Spread?
A spread is the difference between the Ask price (the price you buy at) and the
Bid price (the price you sell at) quoted in pips. If the quote between EUR/USD at
a given moment is 1.2220/2, then the spread is 2 pips. If the quote is 1.22235/50,
then the spread is 1.5 pips.
It is how brokers make money. Wider spreads result in a higher ask price and a lower
bid price. As a consequence, you pay more when you buy and get less when you sell,
which will make it more difficult to realize a profit. Brokers don't typically earn
the full spread, especially when they hedge client positions. The spread compensates
the market maker for taking on risk from the time it executes a client trade to
when the broker's net exposure is hedged (possibly at a different price).
Why Are Spreads So Important?
Spreads affect the return on your trading strategy in a big way. Probably more than
you think. As a trader, your sole interest is buying low and selling high. Wider
spreads means buying higher and having to sell lower. A half-pip lower spread doesn't
sound like much, but it can easily make the difference between a profitable trading
strategy and an unprofitable one.
Risk Management Strategies
The most common and important tool in currency trading is the stop-loss order. A
stop-loss order ensures that a particular position is automatically liquidated at
a predetermined price in order to limit potential losses, should the market move
against a trader's position.
You must set up strict stop-loss limits for your losing trades, so that you don't
lose more than you can handle. If the market starts going in the wrong direction,
don't try to think of excuses why you shouldn't close that position and cancel the
order. This is the reason you have to place the order and not just have a stop-loss
level set in your mind. Even if the market starts going in the right direction 5
minutes later, you have eliminated the risk of it not turning around. Your trading
rules are there so that you can trade by them, not to try to go around them - you
would only be hurting yourself if you did.
One of the most deadly mistakes a trader may commit, one which can destroy any trading
strategy, is when he/she (after already being down on a position) begins to think
of excuses not to close the position – he/she thinks that perhaps the market will
suddenly turn around and move in a favourable direction. The trader keeps thinking
of this, and doesn't have the discipline to close the falling position. Don’t wait
until this happens. The market does not do any favours for anyone. Eventually, the
trader may be forced to close the position with much greater losses.
Losing the amount the trader was willing to lose using the original stop-loss level
probably wouldn't hurt his/her opportunity to make up his/her losses. Losing 2,
3 or 4 times more in 1 trade can completely destroy any strategy. Not only will
the trader lose more money than intended, but he/she will lose morale, as it's now
much harder to make up the losses. He/she will also lose confidence in himself/herself
and his/her ability.
As well as placing stop-loss orders, FXGM recommends that in most cases to enter
limit (profit take) orders at the same time using the OCO order function. The reason
for this is similar to the reason for placing stop orders.
Whereas it can be very tempting to overrun losses, with losing positions, it can
be just as tempting to lock in a profit too early with winning positions. By placing
limits you will eliminate the risk of not being patient enough and taking profit
too early. The target level should also be decided along with the choice of point
of entry, not after the position has been entered. However, you may feel confident
in your ability not to take profit too early, and prefer to monitor the market in
order to take advantage of possible breakthroughs in support or resistance levels.
In this case placing only a stop-loss order is an option.
Risks associated to Forex Trading
Trading foreign currencies is a challenging and potentially profitable opportunity
for educated and experienced investors. However, before deciding to participate
in the Forex market, you should carefully consider your investment objectives, level
of experience and risk appetite. Most importantly, do not invest money you cannot
afford to lose.
There is considerable exposure to risk in any foreign exchange transaction. Any
transaction with currencies involves risks, including, but not limited to the potential
of a changing political and/or economic conditions that may substantially affect
the price or liquidity of a currency. Moreover, the leveraged nature of FX trading
means that any market movement will have an effect on your deposited funds proportionally
equal to the leverage factor. This may work against you as well as for you.
The Forex Market is the largest and most liquid financial market in the world. Since
macroeconomic forces are one of the main drivers of the value of currencies in the
global economy, currencies tend to have the most identifiable trend patterns. Therefore,
the Forex market is a very attractive market for active traders.
The most enticing aspect of trading Forex is the high degree of leverage used. Leverage
seems very attractive to those who are expecting to turn small amounts of money
into large amounts in a short period of time. However, leverage is a double-edged
sword. Just because one lot ($10,000) of currency only requires $100 as a minimum
margin deposit, it does not mean that a trader with $1,000 in his/her account should
be easily able to trade 10 lots. One lot is $10,000 and should be treated as a $100,000
investment and not the $1,000 put up as margin. Most traders analyze the charts
correctly and place sensible trades, yet they tend to over leverage themselves (get
in with a position that is too big for their portfolio), and as a consequence, often
end up forced to exit a position at the wrong time.
For example, if your account value is $10,000 and you place a trade for 1 lot, you
are in effect, leveraging yourself 10 to 1, which is a very significant level of
leverage. Most professional money managers will leverage no more than 3 or 4 times.
Trading in small increments with protective stops on your positions will allow one
the opportunity to be successful in Forex trading.
Utilizing Stop Loss Order
A stop-loss is an order linked to a specific position for the purpose of closing
that position and preventing the position from accruing additional losses. A stop-loss
order placed on a buy (or long) position is a stop-loss order to sell and close
that position. A stop-loss order placed on a sell (or short) position is a stop-loss
order to buy and close that position. A stop-loss order remains in effect until
the position is liquidated or the client cancels the stop-loss order. As an example,
if an investor is long (buy) USD at 117.27 they might wish to put in a stop-loss
order to sell at 116.49, which would limit the loss on the position to the difference
between the two rates (117.27-116.49) should the dollar depreciate below 116.49.
A stop-loss would not be executed and the position would remain open until the market
trades at the stop-loss level. Stop-loss orders are an essential tool for controlling
your risk in Forex currency trading.
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