Basics of Forex Trading – How to Trade Forex
For starters, forex stands for the foreign exchange. It’s also referred to as the currency market, FX, or currency trading. As it grows annually, it became the largest investment market in the world, reaching $4 trillion in daily average turnover.
What is forex trading?
Forex trading is the buying of one currency and selling another simultaneously in the forex market. Currencies are important to people all over the globe, whether they know it or not.
But why is that?
That is because currencies need to be exchanged in order to conduct foreign trade and business. The global need of governments, businesses, and individuals to exchange currencies is the main reason why Forex is the largest, most popular, and the highest liquidity in the world.
The mechanics of a trade are similar to those in other markets. As mentioned above, the only difference is you’re buying one currency, and selling another currency concurrently.
This is the reason why currencies are quotes in pairs. Example is the EUR/USD or GBP/USD. The exchange rate represents the purchase price between the two currencies.
What does this mean then?
The EUR/USD rate is the number of USD one EUR can buy. If you think the EUR’s price will increase against USD, you buy EUR with USD.
Now, if the exchange rate rises, you sell EUR back. Then, you cash in your profit.
Understanding a Forex Quote – How to read them
As what you see from the examples earlier, currencies are always quoted in pairs.
All forex quotes are quoted with two prices, the bid and ask. In most cases, the bid is always lower than the ask price.
Bid – this is the price your broker is willing to buy the base currency in exchange for the quote currency. Meaning, the bid is the best available price at which you will sell to the market.
Ask – this is the price your broker will sell the base currency in exchange for the quote currency. The ask is the best available price at which you will buy from the market.
The difference between ask and bid is the Spread, which we’ll talk about it later.
Great, we just made it through chapter 1!
There’s still more you need to learn on how to trade in currency. But we’ll get there.