Lesson #2: How Trading Forex Can Make You Earn Money

You will sell and buy currencies at the Foreign Exchange market. The process of trading at Forex is fairly simple. The steps used in other markets, like the stock market, are also utilized in Forex. You will be able to easily grasp Forex trading especially if you have experience in other markets.

The main objective in Forex trading is to exchange currency with another currency hoping that the prices will shift favorably. In this way, the currency you bought will be more valuable and more expensive than the one you sold.

How to Read an FX Quote

At the Forex, currencies are always in pairs. Examples of currencies pairs are GBP/USD or USD/JPY. The pairing of currencies has a specific reason. At the Forex market, when you open a trade you are essentially buying a currency and selling another simultaneously. The following is a concrete example of exchange rate for the British Pound versus the U.S. Dollar:

GBP/USD = 1.7500

The first currency located before the slash is called the base currency. In the example above, this is the British Pound. The second currency after the slash, which is the U.S. Dollar, is called the counter or quoted currency.

If you buy, the foreign exchange rate will show you how much you need to pay for the quoted currency in order to buy 1 unit of the first or base currency. The above example shows that you need 1.7500 U.S. Dollars so you can buy 1 British Pound.

If you sell, the foreign exchange rate will show you how much can you earn from the quoted currency if you sell 1 unit of the base currency. Using the example, you will be able to receive 1.7500 U.S. Dollars if you sell 1 British Pound.

Essentially, the basis for buying and selling currencies is the base currency. When you buy EUR/USD, this can only mean that you are buying Euros while selling the U.S. Dollar.

You should buy a currency pair if you think the base currency will go up versus the quoted currency. On the other hand you have to sell a currency pair if you think the base currency will go down versus the quoted currency.

Long/Short

First, you have to determine if you will buy or sell currencies.

If you will buy, you are expecting the base currency to appreciate and go up so you can sell this at a profit. At the Forex market, this is normally referred as ‘going long’ or ‘taking long position.’ For easy reference: long = buy.

If you want to sell, you are expecting the base currency to depreciate and fall down so you can buy it later at a cheaper price. You are now ‘going short’ or in other words, ‘taking short positions.’ For your reference: short = sell.

Bid/Ask Spread

There is always a bid price and ask price in all Forex market quotes. Take note that the bid will always be lower than the ask price.

When you speak of bid, this is the price that a dealer would want to buy the base currency for the quoted currency. Essentially, the bid is your price for selling.

On the other hand, the ask price is the amount that a dealer would want to sell the base currency to take the quoted currency. Essentially, the ask is the price basis of your purchase.

If you get the difference between bid and ask, this is commonly called your spread or simply Spread.