Currencies are bought and sold on the foreign exchange market, or forex. The forex market is the largest market in the world and operates twenty-four hours a day, five and a half days a week. When you invest in the forex, you are competing with large banks and financial institutions, so education is essential.
The objective in trading forex is to exchange one currency for another with the expectation that the price will change. The aim is that the currency you purchased will rise in value compared to the currency you sold.
It is easy to place a trade in the forex market, as the execution of trading the currency market is similar to that of other markets. You should have no issues with learning to trade the FX markets if you have experience trading.
Reading A Forex Quote
In every forex transaction, you are buying one country’s currency and selling another, so currencies are always quoted in pairs such as EUR/USD and GBP/USD. The currency listed first (to the left of the “/”) is referred to as the base currency and the second currency is referred to as the quote currency or counter currency.
When purchasing a currency, the exchange rate tells you how much you must pay in units of the counter currency to buy one unit of the base currency. When you are selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency.
The basis for the buy or the sell is the base currency. If you buy USD/EUR it means that are purchasing the base currency while at the same time, selling the quote currency. In other words, buy USD, sell EUR.
If you think that the base currency will gain in value relative to the quote currency, then you would buy the pair. If you think that the base currency will lose value relative to the quote currency, then you would sell the pair.
Going Long/Going Short
When you are taking a long position, or going long, you are buying the base currency and selling the quote currency hoping that the base currency rises in value, at which time you sell it back at a higher price.
When you are taking a short position, or going short, you sell the base currency and buy the quote currency hoping that the base currency falls in value, at which time you buy it back at a lower price.
Forex quotes always have two prices, the bid price and the ask price. Usually, the ask price will be larger than the bid price. The bid price is the price at which your broker is willing to purchase the base currency in exchange for the quote currency. This bid is the best acquirable price that a trader will sell to the market.
The ask price is the price at which your 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. The difference between these two prices is referred to as the spread.
In the forex market, you as the buyer will always pay the ask price, and the seller always accepts the bid price, and your forex broker profits the difference.
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