How do you Trade Forex?

How do you Trade Forex? Lesson No 6

Trading money over the world is similar to foreign exchange trading. It’s similar to exchanging your local currency for another while travelling, but on a much larger scale. In this worldwide market, people bet on whether a currency’s value will rise or fall. Large businesses and ordinary people can both get involved in different ways.

How Can I Make Money By Trade Forex?

Consider a large worldwide marketplace in which banks, corporations, and ordinary citizens place bets on how the prices of various currencies will fluctuate. It’s called the forex or FX market. Consider it a site where people bet on whether the exchange rates between different currencies will rise or fall. The currency market is the world’s largest financial market.

How does Forex trading work?

As a forex trader, your main objective is to predict whether the value of one currency will rise or fall relative to another. To put it simply, forex trading is the practice of predicting what will happen in currency markets in order to earn.

Various factors determine the value of a currency, including economic conditions, politics, world events, and business transactions. If you’ve previously traded in other markets, such as stocks, trading in the currency market will be recognisable to you.

In simple terms, forex trading is the exchange of one currency for another, with the expectation that the currency you buy will increase in value relative to the one you sell.

“An exchange rate is simply the ratio of one currency valued against another currency.”

For example, the USD/CHF exchange rate indicates how many US dollars are required to purchase one Swiss franc, and vice versa.

How do I read a forex quote?

In forex, you always deal in currency pairings, such as GBP/USD or USD/JPY. This is because each FX transaction entails purchasing one currency and selling another.

You may be asking how to determine which currency you are purchasing and selling. Great question! Here’s where base and quotation currencies come into play…

Base and Quote Currency

In forex trading, you are effectively exchanging one currency for another. Currencies are often compared. Consider the exchange rate for the British pound against the US dollar as an example.

                  GBP / USD = 1.21228

GBP Represent Base Currency

USD Quote Currency

The first currency stated before the slash (“/”) in a currency pair is the base currency (in this case, the British pound). It’s similar to the starting point, which is always valued at one.

The second currency indicated after the slash is the counter or quote currency (in this case, the US dollar).

Buying and selling.

When you buy, the exchange rate tells you how much of the quote currency is required to obtain ONE unit of the base currency. For example, if you buy one British pound, it may cost you 1.21228 USD.

Selling: When you sell, the exchange rate indicates how much of the quote currency you receive for selling ONE unit of the base currency. So, if you sell one British pound, you might get 1.21228 US dollars.

“The exchange rate, or the ‘price,’ indicates how much of the quotation currency is required to obtain one unit of the base currency. It’s similar to the value you pay or receive when trading currencies.

Buying and Selling Example

Now, suppose you see EUR/USD. If you buy this, you will receive the base currency (EUR) and give away the quoted currency (USD). It’s like saying, “Buy EUR, sell USD.”

When to Buy or Sell: Buy the pair if you believe the base currency will increase in value compared to the quote currency. If you believe the base currency will lose value against the quote currency, you should sell the pair.

Now, there’s a cool thing about composing these pairs. A slash (“/”) is occasionally used, although it is only a method of doing things. Some people may use a period, a dash, or nothing at all. “EUR/USD” can alternatively be written as “EUR-USD” or simply “EURUSD.” They all mean the same thing.

“Long” and “Short”

First and foremost, decide whether you want to buy or sell.

Buying involves buying the base currency and selling the quote currency. You want the value of the base currency to rise so that you can sell it later at a greater price. In trading language, this is referred to as “going long” or taking a “long position.” Just keep in mind that long equals purchase.

Selling involves selling the base currency and purchasing the quotation currency. Your goal is for the base currency’s value to fall so that you may buy it back at a lesser price. It is referred to as “going short” or taking a “short position.” In trader language, short means sell.

In simple words, long means buy and short means sell.
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Flat or Square

If you don’t have any current trades, you’re classified as “flat” or “square.” When you decide to close a deal, you are referred to as “closing a position” or simply “squaring up.” It’s similar to organising your trading activities.

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The Bid, Ask and Spread

Every quote in the forex market includes two prices: the bid and the ask.

The bid price is usually lower than the ask price. It’s just the way the currency market works.
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Okay, let’s understand three important trading terms: bid, ask, and spread.

Bid

Bids are similar to selling prices. It is the value at which you are willing to trade your initial currency for another. Consider it the ideal offer for you when you’re selling on the market. If you choose to sell, your broker will buy it from you for the bid price. It’s simply the current market price for selling.

Ask

Ask what your purchase price is. It is the rate at which the trader is willing to sell you the initial currency in exchange for the other. Consider it the best market rate for you when you want to buy something. Another term for it is the “offer price.” If you decide to buy, your broker will sell it to you for the asking price. It effectively represents the market’s selling price for you.

Spread

Spread is defined as the difference between bid and ask prices. It is the difference between what you can sell and buy.

Now let’s look at an example. The EUR/USD bid price is 1.34568, while the ask price is 1.34588. Check out how the trader makes it easier for you.

If you want to sell euros, click “Sell,” and the price will be €1.34568. If you want to buy euros, click “Buy,” and you will receive them for 1.34588.

To summarise, the spread is the difference between what the trader is willing to pay you when you sell and what they charge when you purchase.

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