It is straightforward to place a deal on the foreign exchange market. Because the trading forex mechanics are extremely similar to those found in other financial markets (such as the stock market), if you have previous trading expertise, you should have no trouble understanding forex trading.
Forex trading aims to exchange one currency for another in hopes of changing the price. More specifically, the currency you acquire will increase in value relative to the currency you sell.
Here’s an example:
The exchange rate is simply the ratio of one currency to another.
How to Read Forex Quote
Currency pairs, such as GBP/USD or USD/JPY, are always quoted.
They are priced in pairs because every foreign exchange transaction involves the simultaneous purchase of one currency and sale of another.
Here’s an example of a currency exchange rate between the British pound and the US dollar:
The base currency is the first listed currency to the left of the slash (“/”). (in this example, the British pound). The base currency serves as the reference point for the currency pair’s exchange rate. It always has a value of one.
The counter or quote currency is the second listed currency on the right (in this example, the U.S. dollar).
When purchasing, the exchange rate indicates how much you must pay in units of the quote currency to obtain ONE unit of the base currency. On the left example, one British pound costs 1.21228 US dollars.
The exchange rate tells you how many units of the quote currency you get for selling ONE unit of the base currency when you sell.
When you sell one British pound in the preceding example, you will receive 1.21228 US dollars.
The base currency represents the amount of the quote currency required to obtain one unit of the base currency. If you purchase EUR/USD, This basically indicates that you are purchasing the base currency while selling the quote currency.
If you feel the base currency would appreciate (gain value) in relation to the quote currency, you would buy the pair.
If you believe the base currency would depreciate (lose value) in relation to the quote currency, you would sell the pair.
Long and Short
To begin, you must decide whether you want to buy or sell.
If you wish to purchase (which actually means buy the base currency and sell the quote currency), you want the value of the base currency to grow so that you can sell it back at a better price.
This is known as “going long” or taking a “long position” in the trading world. Just keep in mind that long = purchase.
If you wish to sell (which actually means sell the base currency and purchase the quote currency), you want the value of the base currency to decline so that you may buy it back at a lower price. This is referred to as “going short” or taking a “short posture.”
Bid, Ask dan Spread
All forex quotations include two prices: the bid and ask.
The bid is usually lower than the ask price.
What is Bid?
The bid is the price at which your broker is willing to swap the base currency for the quote currency. This means that the bid is the best price at which you (the trader) can sell to the market. If you want to sell something, the broker will pay you the bid price for it.
What is Ask?
The ask rate is the price at which your broker will sell the base currency for the quote currency. This means that the requested price is the best available market price at which you may buy. The offer price is another term for ask. If you want to purchase something, the broker will sell (or offer to sell) it to you at the asking price.
What is Spread?
The SPREAD is the difference between the bid and ask prices. The bid price on the EUR/USD rate above is 1.34568, while the ask price is 1.34588. Look at how easy it is for you to trade away your money with this broker.
If you want to sell EUR, click “Sell” and the price will be 1.34568.
If you wish to buy EUR, click “Buy” and the price will be 1.34588.
Here’s an illustration that summarizes everything we’ve discussed in this lesson:
Next Lesson: When Should You Buy or Sell a Currency Pair?
