The position of trade in the foreign exchange market is simple. Trading mechanisms are quite similar to those in other financial markets (such as the stock market), so if you have any trading experience you should be able to get them very quickly.
And if you don’t, you will still be able to receive it … as long as you have finished School of Pipsology, our Forex trading course!
The goal of Forex trading is to exchange one currency for another in the hope that the price will change.
More specifically, the value of the currency you purchased will increase compared to the currency you sold.
How to read a Forex quotation
Currencies are always displayed in pairs, such as GBP / USD or USD / JPY. The reason they are transferred in pairs is that, in every foreign exchange transaction, you buy one currency at a time and sell another.
The first currency listed on the left of the slash (“/”) is known as the base currency (in this example, the British pound), while the second coin on the right is called the counter or quote (in this example, the US dollar).
When purchasing, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you would have to pay $ 1.51258 to buy one £.
When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency.
The base currency is the “base” for buying or selling.
If you bought EUR / USD, this simply means that you are buying the base currency and selling the price currency at one time.
In a caveman talk, “Buy the euro, sell the dollar.”
You will buy the pair if you believe that the base currency will be (the value of the profit) relative to the quote currency.
You will sell the pair if you think the base currency will decrease (lose value) relative to the quote currency.
First, you must decide whether to buy or sell.
If you want to buy (which actually means buying the base currency and selling the quote currency), you want the base currency to rise in value and then you can sell it again at a higher price.
In a recent conversation, this is called a “long buy” or a “long buy position”. Just remember: long = buy.
If you want to sell (which actually means selling the base currency and buying the quote currency), you want the base currency to depreciate and then buy it back at a lower price.
The show, ask and spread
All foreign exchange rates are quoted at two prices: supply and demand.
In general, the offer is lower than the asking price.
The bid is the price that your broker wants to buy the base currency in exchange for the quote currency.
This means that the bid price is the best available price at which the (merchant) will sell to the market.
If you want to sell something, the broker will buy it from you at the bid price.
Demand is the price at which the broker will sell the base currency in exchange for the quote currency.
This means that the ask price is the best available price at which you will buy from the market.
Another word to ask is the offer price.
If you want to buy something, the broker sells it (or offers it) to you at the asking price.
The difference between the bid and ask price is known as SPREAD.
On the EUR / USD price above, the offer price is 1.34568 and the ask price is 1.34588. See how this broker has made it easy to trade your money.
If you want to sell the euro, click “Sell” and it will sell the euro at 1.34568.
If you want to buy the euro, click “buy” and you will buy the euro at 1.34588.
In the following examples, we will use fundamental analysis to help us decide whether to buy or sell a specific currency pair.
Each currency belongs to a country (or region). Therefore, the fundamental Forex analysis focuses on the general state of a country’s economy, such as productivity, employment, manufacturing, international trade and the interest rate
If you were always asleep during your economic classroom or were not giving up on economy class, don’t worry!
EUR / USD
In this example, the Euro is the base currency and thus the “basis” for the buy / sell.
If you believe the US economy will continue to weaken, which is bad for the US dollar, you will execute a EUR / USD purchase order.
By doing this, I bought the Euro in anticipation of a rise against the US Dollar.
If you believe that the US economy is strong and that the euro will weaken against the US dollar, you will execute a EUR / USD sell order.
By doing this, I sold the euro in the hope that it would fall against the US dollar.
USD / JPY
In this example, the US dollar is the base currency and thus the “basis” for the buy / sell.