Forex – How You Make Money in Trading Forex?
When we talk about Forex market, it means you buy or sell currencies like Yen, Dollars, Euro and many more.
In the forex market, placing a trade is pretty simple: the mechanics is almost similar to the mechanics that you can find other markets like the one in stock market. So, having an experience in trading stocks gives you an advantage in trading forex.
The object of forex trading is to exchange one currency for another in the expectation that soon prices will change, so that the currency you bought will increase in value compared to the one you sold.
An exchange rate is simply the ratio of 1 currency valued against another currency. Let say for example, the USD/CHF exchange rate suggests how many U.S. dollars can buy one Swiss franc, or how many Swiss francs do you actually need to buy one U.S. dollar. Let’s take a look at the example below on how to read Forex quote.
How To Read a Forex Quote
In the world of market and trading, currencies are always quotes in pairs. Most common pairs are GBP/USD or USD/JPY. NOw, what’s the reason why these currencies come in pair? They are quoted in pairs because in every forex transaction, you are simultaneously buying one currency and selling another. Below is an example of a forex rate for the British pound versus the U.S. dollar:
The GBP currency to the left of the slash (“/”) is known as the base currency, while the USD on the right is called the counter or quote currency.
When you are buying, it is the exchange rate that tells you how much you need to pay in the units of the quote currency in order to buy one unit of the base currency. Just by looking at the example above, it clearly indicates that you have to pay 1.51258 USD to be able to buy one British pound.
Always remember that the basis for the buy or the sell is the base currency. If you buy EUR/USD, that simply means that you are buying the base currency while simultaneously selling the quote currency. In simpler terms, “buy Euro, sell US Dollars.”
As a market player, you would always want to buy the pair if the base currency will gain value relative to the quote currency. On the other hand, you would want to see the pair if you think that the base currency will lose value relative to the quote currency.
Before everything else, it is imperative for you to know and determine whether you want to buy or to sell.
If you want to buy the base currency and sell the quote currency, you want the base currency to rise in value and then you would probably sell it back at a higher price. As a market player, this process is called “going long”or taking a “long position. All you have to remember is long = buy.
On the other hand, if you want to sell the base currency and buy the qote currency, you want the base currency to depreciate in value and then you would purchase it back at a lower price. In a trader’s talk, this is what we call “going short”or taking a “short position”. Always remember: short = sell
In forex market, all foreign exchange quotes are always quotes with 2 prices: the bid and ask. For the most part, the ask price is higher that the bid price.
What is a Bid in Forex Market?
The bid is the value at which your broker is inclined toward buying the base currency in exchange for the quote currency. This only means that the bid is the best available value or price at which the trader will sell to the forex market.
What is an Ask in Forex Market?
The ask is the value at which the broker will sell the base currency in exchange for the quote. This only means that the ask price is the best available value at which the trader buys from the forex market. In a much simpler term, ask price is the offer price.
Now, what’s the difference between the bid and the ask price?
The difference between the 2 is popularly known as the spread.
When we talk about the EUR/USD quote as indicated above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.
This is what will happen. If you are going to click the “Sell” button, then you are selling the Euros at 1.3456. On the other hand, if you are going to click the “Buy” button, then you are buying the Euros at 1.34588.
In the next lesson, we will find more examples about trading forex. Are you ready to make some money?
Proceed to the Next Lesson: Time To Make Some Money or Dough
Go Back to the previous Lesson : How Do You Trade Forex?
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