In the Forex market, you buy or sell currencies.
Placing a trade in the foreign exchange market is very simple: the mechanism of a transaction is similar to those of other markets (such as the stock market), so if you have any experience in trading, you should be able to understand it fairly quickly.
The object of Forex trading is to exchange one currency for another, assuming that the price will change so that the currency you buy will appreciate relative to the currency you sell.
*10,000 EUR x 1.18 = 11,800 USD
**10,000 EUR x 1.25 = 12,500 USD
An exchange rate represents the ratio of one currency to another. For example, the USD/CHF exchange rate indicates how many US dollars can buy one Swiss Franc, or how many Swiss Francs are needed to buy one US dollar.
How to read a Forex quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason why they are quoted in this way is justified by the continuous alternation of buying and selling of one currency against another. Here is an example of the foreign exchange rate for the British Pound against the US Dollar:
The first currency listed to the left of the “slash” (“/”) is called the “base currency” (in this example the British Pound), while the second currency listed to the right is called the “quote currency” (in this example the US Dollar).
When making a purchase, the exchange rate indicates the amount to be paid in quote units to buy one unit of the base currency. In our example above, you would have to pay US$1.51258 to buy 1 British Pound.
On a sale, the exchange rate indicates the amount you have to pay in quote units to sell one unit of the base currency. In our example above, you will receive US$1.51258 by selling 1 British Pound.
The base currency represents the “basis” of the purchase or sale. If you buy EUR/USD, it simply means that you are buying the base currency while selling the quote currency. More simply, you buy the EUR to sell the USD.
You will buy the pair if you think the base currency will appreciate (gain value) against the quote currency. You will sell the pair if you think the base currency will depreciate (lose value) against the quote currency.
First of all, you should determine whether you want to sell or buy.
If you wish to buy (which means buying the base currency and selling the quote currency), the base currency needs to appreciate in order to be able to sell it at a higher price. In trading terms, this is called “longing” or taking a “long position”. Just remember: long = buy.
To sell (which means selling the base currency and buying the quote currency), the base currency has to depreciate in order to be able to buy it back at a lower price. This is called “shorting” or taking a “short position”. Remember: short = sell.
All quotations on Forex are represented as follows: the offer (“bid”) and the demand (“ask”). In most cases, the bid price is lower than the ask price.
The bid represents the price at which your broker can buy the base currency in exchange for the quote currency. This means that the bid represents the best available price at which you, the trader, will sell into the market.
The ask is the price at which your broker is willing to 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 in the market. “Ask” actually means “bid price”.
The difference between the “bid” and “ask” prices is called the spread.
On the EUR/USD quoted above, the bid price is 1.34568 and the ask price is 1.34588. See how easy this brokerage system makes trading so easy.
If you wish to sell EUR, click “Sell” and you will sell EUR at the price of 1.34568. If you want to buy the EUR, click “Buy” and you will buy Euros at the price of 1.34588.