Making money in forex trading is not as complicated as most people think. The forex trading mechanics are the same as those in various financial markets like the stock exchange market. If you have some essential trading experience, forex shouldn’t be too hard. If you have no experience, picking up is not hard either.
Forex trading aims to exchange one currency for another one, expecting that the price will shift. The expectation is that the currency you bought will increase in value compared to the currency you sold.
For example, if you buy 10,000 Euros at the exchange rate of EUR/USD 1.1800, then three weeks later exchange the same amount of Euros back into USD at an exchange rate of 1.2500, you will; have made a profit of $700. (EUR 10,000 x 1.18 = US $11,800; EUR 10,000 x 1.25 = US $12,500. $12,500- $11800= $700).
In forex, currencies are quoted in pairs like USD/EURO, GBP/USD, etc. This is because, in all foreign exchange transactions, traders buy and sell one of each currency. You know the currency to buy using the base and quote currencies concept.
When in forex you have an open position, you exchange one currency for another. The currency quotation relates to other currencies in the market. For example, GBP/USD. The first currency (GBP) is the base currency and is the reference element for the two currencies’ exchange rate and always retains a value of one. The second currency (USD) is the quote or counter currency.
When you are buying, the exchange rate indicates how much you should pay on the counter or quote currency units to buy one base currency unit. In the above example, you will pay 1.21228 USD for 1 GBP. When selling, the exchange rates inform how many units of the counter currency you will receive for selling one unit of the base currency.
In the quoted example, you receive 1.21228 USD after the sale of 1 GBP. The base currency indicates how much of the counter currency you need to buy one base currency unit. If you purchase EUR/USD, this means you are purchasing the base currency and selling the counter currency. In simple terms, you are buying EUR and selling USD.
You can buy a pair if you think the base currency will gain value relative to the quote currency’s value. You can sell a pair if you think the base currency might drop in value relative to the counter/quote currency.
As with any industry, there is jargon used that only insiders know. In forex, here are some commonly used terms.
Determine whether you are buying or selling. If you intend to buy, which means buying the base and selling the counter currency, you expect the base currency’s value to rise and sell it for a higher amount. This is called taking a long position or going long. Simply, long is buying.
If you intend to sell, meaning sells the base and buy the counter currency; you hope the base falls in value so that you buy it at a lower price. This is known as taking a short position or going short.
If you do not have an open position, you are square or flat. When you close a position, it’s called squaring up.
Forex quotes are usually in two prices, the bis and the ask. Typically, the bid is lower than the asking price.
The bid is the price at which a broker is willing to purchase the base currency in exchange for the counter currency. This makes the bid the best possible price at which a trader can sell the currency. If you are selling, a broker will buy from you at the bid price.
Ask is the price a broker is willing to sell the base currency in exchange for the counter currency. This makes the ask or offer price the best possible price you can buy a currency from the market. If you are buying, the broker will sell or offer for sale at the ask price.
Spread is the difference between the bid and the ask price.
If you want to trade in forex, you need to first educate yourself on the dos and don’ts, the terminology, etc. Once you feel you know enough on the subject, you can venture into it, but invest little by little until you get the hang of things. Get a mentor who has been in the business for a while and ask them to guide you.