How does forex trading work ?
In the forex market, you buy or sell currencies .
Placing a trade in the alien exchange market is dim-witted. The mechanics of a craft are very similar to those found in early fiscal markets ( like the broth market ), thus if you have any feel in deal, you should be able to pick it up pretty cursorily.
Reading: How to Make Money Trading Forex
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The objective of forex trade is to exchange one currency for another in the anticipation that the price will change .
More specifically, that the currency you bought will increase in value compared to the matchless you sold .
here ’ s an exemplar :
|You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800||+10,000||-11,800*|
|Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500||-10,000||+12,500**|
|You earn a profit of $700||0||+700|
*EUR 10,000 x 1.18 = US $ 11,800
** EUR 10,000 x 1.25 = US $ 12,500
An exchange rate is simply the ratio of one currency valued against another currency.
For case, the USD/CHF substitution rate indicates how many U.S. dollars can purchase one Swiss franc, or how many swiss francs you need to buy one U.S. dollar .
How to Read a Forex Quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY .
The reason they are quoted in couple is that, in every alien switch over transaction, you are simultaneously buying one currency and selling another .
How do you know which currentness you are buying and which you are selling ?
excellent interview ! This is where the concepts of base and quote currencies come in…
Base and Quote Currency
Whenever you have an open position in forex trading, you are exchanging one currency for another.
Currencies are quoted in relation back to early currencies .
here is an example of a foreign change rate for the british pound versus the U.S. dollar :
The first list currency to the exit of the slash ( “ / ” ) is known as the base currency ( in this exemplar, the british british pound ) .
The foundation currency is the reference elemen thyroxine for the exchange rate of the currentness pair. It constantly has a value of one .
The second listed currency on the right is called the counter or quote currency ( in this example, the U.S. dollar ) .
When buying, 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.
When buy, the exchange rate tells you how much you have to pay in units of the quote currency to buy In the model above, you have to pay 1.21228 U.S. dollars to buy 1 British pound .
When deal, the exchange pace tells you how many units of the quotation currentness you get for selling ONE unit of the base currency .
In the example above, you will receive 1.21228 U.S. dollars when you sell 1 British pound .
The base currentness represents how much of the quotation currentness is needed for you to get one whole of the base currentness
If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currentness .
In caveman talk, “ buy EUR, sell USD. ”
- You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency.
- You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.
With therefore many currentness pairs to trade, how do forex brokers know which currency to list as the base currentness and the quotation mark currency ?
fortunately, the way that currency pairs are quoted in the forex market is standardized .
You may have noticed that currencies quoted as a currentness match are normally separated with a slash ( “ / ” ) character .
just know that this is a topic of preference and the slash may be omitted or replaced by a period, a dash, or nothing at all .
For case, some traders may type “ EUR/USD ” as “ EUR-USD ” or good “ EURUSD ”. They all mean the same thang .
“Long” and “Short”
First, you should determine whether you want to buy or sell .
If you want to buy ( which actually means buy the base currency and sell the quotation currency ), you want the al-qaeda currency to rise in value and then you would sell it bet on at a higher price .
In trader talk, this is called “ going long ” or taking a “ long position. ” Just remember : long = buy.
If you want to sell ( which actually means sell the base currency and buy the quotation currency ), you want the base currency to fall in prize and then you would buy it back at a lower price .
This is called “ going short ” or taking a “ short put ” .
equitable remember : short = sell.
“I’m long AND short.”
Flat or Square
If you have no open position, then you are said to be “ flat” or “ square” .
Closing a position is besides called “ squaring up “ .
The Bid, Ask and Spread
All forex quotes are quoted with two prices : the bid and ask .
In general, the bid is lower than the ask price .
What is “Bid”?
The bid is the price at which your broker is bequeath to buy the establish currency in central for the quotation mark currency .
This means the invite is the best available price at which you ( the trader ) can sell to the market .
If you want to sell something, the broker will buy it from you at the bid price .
What is “Ask”?
The ask is the price at which your agent will sell the nucleotide currency in exchange for the quotation currentness .
This means the ask price is the best available price at which you can buy from the market .
Another parole for necessitate is the offer price.
If you want to buy something, the broke will sell ( or offer ) it to you at the ask price .
What is “Spread”?
The dispute between the invite and the ask monetary value is known as the SPREAD .
On the EUR/USD quotation above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this agent makes it so easy for you to trade away your money.
- If you want to sell EUR, you click “Sell” and you will sell euros at 1.34568.
- If you want to buy EUR, you click “Buy” and you will buy euros at 1.34588.
here ’ s an exemplification that puts together everything we ’ ve covered in this moral :
now let ’ s take a look at some examples .