In any venture or financial investment, the sole aim is to make money; if it is not making money, it is not worth doing at all. Forex trading is a passive way of making money; Forex trading means foreign exchange trading, that is, buying and selling of currency. This is a very dicey trade but at the same time a gold mine for those who play the game meticulously.
Forex trading is a very sensitive trade; it is an inkling of creative thinking, where one’s versatility and ability to predict and win come to play. When you trade with Forex, you buy and sell money simultaneously; just like all kinds of trade, you only smile when you make profit. Making money with Forex trading takes a lot of trials and errors.
Truly, it is lucrative business but not always easy as it seems; your profit is determined by the present state of the economy of the country, whose currency you are trading. When the economic situation of a country is booming, the currency becomes more valuable, thus, yielding more profit as it would be sold at higher price.
But if the economic situation of the country bad, the value of the country’s currency depreciates, thus, trading with such currency leads to great loss.
This is the basic concept of how trading is done on Forex.
As said earlier, you buy and sell currencies to make money in Forex trading; your objective in Forex trading is to exchange one currency for another in expectation that the price will change so that the currency you bought will increase in value as compared to the one you sold. To make this a successful one, there are some terms and concepts you have to be familiar with; like how to read Forex quote, long and short, bid and ask.
These are the tools you use in the process of your transaction; understanding each of them gives you more insight on how to optimize your opportunity to make money on Forex.
How to read Forex quote
In Forex trading, currencies are always written or quoted in pair, like USD/GBP. This is because in every transaction carried out on Forex trading, you buy one currency and sell another simultaneously; this is how the system works.
So the Forex quote contains the currencies you are buying and selling; the first currency is called the base currency and the second currency is called the quote or counter currency, the base currency is the basis for any transaction, it is strongly considered and used for trading, both buying and selling. For example,
GBP/USD = 1.51258
The GBP is the base currency, the USD is the quote or counter currency. When you want to buy, the exchange rate tells you how much of the quote currency you have to pay to get one unit of the base currency. From the above example, to buy one GBP, you have to pay $1.51258. Also, when selling, the exchange rate tells you how much of the quote currency you get for selling one unit of the base currency. From the above example, you get $1.51258 when you sell one GBP.
You buy when you believe the base currency will gain value against to the quote currency and you sell if you think the base currency will lose value against the quote currency. This determines whether you make profit or loss.
Long and short
The term long is used when you are buying; it is termed long when you want the base currency to appreciate so that you sell back at higher price. It is also called “going long” or “taking long position”. Short is used when you sell. Here, you intentionally wait for the base currency to fall in value so that you buy at lower price. This is also called “going short” or “taking short position”.
Ask and bid
In Forex trading, the quotes usually have two prices, the bid price and the ask price. The bid price is that price at which a broker is willing to buy the base currency in exchange for the quote currency. It is the best price the seller will sell to the market. The ask price is the price at which a broker will sell the base currency in exchange for the quote currency. This is the best price people buy from the market; it is also called “offer price”. The difference between the bid price and the ask price is called “the spread”.
These are the terms used and how they influence Forex trading; proper understanding of these terms enables you understand the market and make profitable decisions which at the end, brings profit.