Trading Forex
| Trading Forex |
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| Wednesday, 17 September 2008 18:44 |
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Trading forex involves the buying or selling of currencies. When a participant places a trade in the foreign exchange market, the goal is to exchange one currency for another expecting that the price of that currency will change so that the currency you purchased will increase in value compared to the one you sold. When the exchange rate goes up on your purchased currency, you may sell it back at a higher price. The exchange rate is the ratio of one currency again another currency. For example the EUR/USD exchange rate refers to how many Euros will purchase on U.S. Dollar. Currencies will always be quoted in pairs because of the simultaneous movement of buying one currency and selling another. When quoting a foreign exchange rate, the first currency is considered the base currency and the second is the counter (or quote) currency. For example, USD/GBP = 1.7500. The U.S. Dollar is quoted as the base currency and the British pound is quoted as the counter currency. When purchasing, the exchange rate displays the amount you must pay in units of the quote currency to buy one unit of the base currency. In this example, you have to pay 1.7500 British pound to buy 1 U.S. dollar. When selling, the exchange rate displays the amount of units of the quote currency you get from selling one unit of the base currency. In this example, you will receive 1.7500 British pount when you sell 1 U.S. Dollar. To determine whether you want to buy or sell, you should pay attention to the base currencies and the quote currencies in these pairs. When you want to buy, you want the base currency to go up so that you can sell it back at a higher price. This is called “going long”. When you want to sell, you want the base currency to fall so that you can buy it back at a lower price. This is called “going short”. Each forex quote, however, will come in a two-part price: the bid and the ask price. The bid, which is always lower than ask price, is the price the dealer is willing to buy the base currency at. The ask price is the price the dealer will sell the base currency at. The difference between the bid and ask is known as the spread. |