In the Forex market, you sell or buy currencies
Placing a trade on the international foreign exchange market is very simple: the mechanism of a transaction is similar to those of other markets (such as the stock market), so if you have some trading experience, you should be able to understand fairly quickly.
The purpose of Forex trading is to exchange one currency for another, assuming that the price will change so that the currency purchased will appreciate in relation to the currency you sold.
|The trader's action||EUR||USD|
|You buy 10,000 euros on the EUR/USD at the exchange rate of,1800||10,000||-11 800*|
|Two weeks later, you exchange your 10,000 euros back into US dollars at the exchange rate of 2011,2500||-10,000||12 500**|
|You made a profit of $700 USD||0||700|
*10,000 EUR x 1.18 = 11,800 USD
**10,000 EUR x 1.25 = 12,500 USD
An exchange rate represents the ratio of one currency to another. For example, the USD/CHF exchange rate indicates how many US dollars can buy a Swiss Franc, or how many Swiss Francs are needed to buy a US dollar.
How to read a quote on Forex
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason why they are quoted in this way is justified by the continuous alternation of purchases and sales from one currency to another. Here is an example of the foreign exchange rate for the British Pound against the US dollar:
The first currency listed to the left of the “slash” (“/”) is called “base currency” (in this example the British Pound), while the second currency on the right is called “quotation currency” (in this example the US dollar).
When a purchase is made, the exchange rate indicates the amount to be paid in quotation units to buy a unit of the base currency. In our example above, you will have to pay 1.51258 US dollars to buy 1 British Pound.
In a sale, the exchange rate indicates the amount to be paid in quotation units to sell a unit of the base currency. In our example above, you will receive 1,51258 US dollars by selling 1 British Pound.
The base currency represents the “basis” for the purchase or sale. If you buy EUR/USD, it simply means that you are buying the base currency while selling the quote currency. More simply, we buy the EUR to sell the USD.
You will buy the pair if you think the base currency will appreciate (appreciate in value) against the quote currency. You will sell the pair if you think the base currency will depreciate (lose value) against the quote currency.
First of all, you should determine whether you want to buy or sell.
If you want to buy (which means buying the base currency and selling the quote currency), the base currency must appreciate in order to be able to resell it at a higher price. In terms of trading, this is called “long term” or taking a “long position”. Just remember: long = purchase.
To sell (which means to sell the base currency and buy the quote currency), the base currency must depreciate in order to be able to buy it back at a lower price. This is called “short term” or taking a “short position”. Remember: short = sale.
“I’m long and short.”
“Why is the quotation presented under two different prices?”
All Forex quotes are represented as follows: bid and ask. In most cases, the bid price is lower than the ask price.
The bid represents the price at which your broker can buy the base currency in exchange for the quotation currency. This means that the bid represents the best available price at which you, the trader, will sell on the market.
The ask represents the price at which your broker is willing to sell the base currency in exchange for the quotation currency. This means that this “ask/demand” price is the best available price at which you will buy on the market. “Ask” does mean “offer price”.
The difference between the “bid” and “ask” prices is called the spread.
On the EUR/USD quoted above, the supply price is 1.34568 and the demand price is 1.34588. Observe how this brokerage system makes trading so easy.
If you want to sell the EUR, click “Sell” and you will sell euros at the price of 1.34568. If you want to buy the EUR, click “Buy” and you will buy euros at the price of 1.34588.
Let’s now look at some other examples in a subsequent article.