Beginner’s Guide to Online Forex Trading – Chapter 5: How To: Trade Forex

This is chapter number 5 out of 17. Read the rest:

Read The Complete Beginner’s Guide to Online Forex Trading – Chapter 1: What is Forex?
Read Beginner’s Guide to Online Forex Trading – Chapter 2: What is done in a Foreign Exchange market?
Read Beginner’s Guide to Online Forex Trading – Chapter 3: Currencies and the Market Opening Hours
Read Beginner’s Guide to Online Forex Trading – Chapter 4: Why so many people are interested in trading in Foreign

How to: Read an FX Quote

 

Proper understanding of the way, currencies are quoted, will help a lot in trading Forex. In every Forex transaction, one has to buy a currency and sell another concurrently. Therefore, currencies are constantly quoted in pairs, like USD/JPY or GBP/USD. In case of GBP/ USD, the first one (GBP) is called the base whereas the second one (USD) is called the quote or counter currency.

The exchange rate, in case of buying, refers to a quantity of quote currency in units to be paid in order to buy a quantity of base currency in units. For example, if a foreign currency exchange rate is quoted as GBP/USD = 1.7500, it means that a trader pays 1.7500 USD (quote currency) in order to buy 1 pound of British currency (base currency).

The exchange rate, in case of selling, refers to a quantity of quote currency in units that will be received by selling a quantity of base currency in units. Thus, if a trader sells one unit of 1 British pound (base currency), he would receive 1.7500 USD (quote currency). It has to be noted that the “basis” for buying or selling is the base currency.  A simultaneous buy of EUR/USD can refer to a transaction where the base currency is bought and the quote currency is sold at the same time.

When the trader believes in an appreciation about to occur in the base currency as compared to the quote, he will buy the pair. And if he thinks that the base is about to depreciate in its value (go down) as compared to the quote, he will sell the pair.

How to: Go Long/Short

The terms ‘Long’ and ‘Short’ are used instead of buy and sell. Initially, the trader determines if he wants to sell or buy. Let’s assume that the trader wants to buy a currency (buy base and sell quote), he expects a rise in base currency’s value so that he can sell it at a price higher than the bought price. This is called taking a “long position” or “going long” in trader’s slang.

Now assume that he wants to sell a currency (sell base and buy quote), he expects a fall in base currency’s value so that he could buy it later at a price lower than the sold price. This action by the trader is called taking a “short position” or “going short”.

How to Bid/Ask Spread

All Foreign exchange quotes include bid and ask (two-way price). Normally, the value of the bid is lower than the value of ask.

Bid refers to the value at which the trader wants to sell the currency to the dealer who is ready to purchase the base in trade for the quote.

Ask refers to the value at which the dealer is ready to sell the base to the trader in trade for the quote. In short, bid is the selling price and ask is the buying price (in trader’s terms).

Spreads refers to the difference in value of bid and ask prices. 

In the figure above you can see that the left column shows the currency pair and then you have the bid and ask prices. The spread is the difference between these two prices.

Read Beginner’s Guide to Online Forex Trading – Chapter 6: Basic Requirements to Start Forex Trading
Read Beginner’s Guide to Online Forex Trading – Chapter 7: Forex trading Necessities
Read Beginner’s Guide to Online Forex Trading – Chapter 8: What is?
Read Beginner’s Guide to Online Forex Trading – Chapter 9: Technical Analysis
Read Beginner’s Guide to Online Forex Trading – Chapter 10: Foreign Exchange Market Orders
Read Beginner’s Guide to Online Forex Trading – Chapter 11: Choosing a Forex Broker
Read Beginner’s Guide to Online Forex Trading – Chapter 12: Tips on Trading Forex Online
Read Beginner’s Guide to Online Forex Trading – Chapter 13: How to Open a Forex Trading Account
Read Beginner’s Guide to Online Forex Trading – Chapter 14: Forex versus Futures
Read Beginner’s Guide to Online Forex Trading – Chapter 15: Forex versus Stocks
Read Beginner’s Guide to Online Forex Trading – Chapter 16: Terms used in Forex Trading – what do they mean?
Read Beginner’s Guide to Online Forex Trading – Chapter 17: Conclusion