Jayden 1. Read forex trading quotes
The rate of exchange between different currencies is called the exchange rate. An exchange rate is effectively the price at which one foreign currency can be purchased in another foreign currency. Exchange rates are often quoted in the form of currency pairs, such as GBP/USD or USD/CHF, the reason we quote them as currency pairs, in each forex trading you buy one currency and sell the other. The following is an example of the GBP/USD exchange rate.
GBP/USD = 1.3500
The first currency listed to the left of the slash is called the base currency, in this case, the base currency is GBP. The second currency listed to the right of the slash is called the quote currency, which in this case is the US dollar.
When buying, the exchange rate tells you how many units of the quoted currency you need to pay, to buy one unit of the base currency. In the example above, you would have to pay $1.3500 to purchase £1.
When selling, the exchange rate tells you how many units of the quoted currency you will receive for selling one unit of the base currency. In the example above, when selling £1, you would receive $1.3500.
The base currency is the “basis” for buying or selling. If you buy EUR/USD, this means that you are buying the base currency and selling the quote currency.
You should buy if you think the base currency will appreciate against the quoted currency (the exchange rate rises); conversely, you should sell if you think the base currency will depreciate against the quoted currency (the exchange rate falls).
2. Forex trading long and short
When trading forex, you first need to decide whether to buy or sell.
If you want to buy (which means buying the base currency and selling the quote currency), then you actually want the base currency to appreciate and you will sell at a higher price.
In trading terms, this is called “going long”. All you need to remember is that going long = buying.
If you want to sell (which means selling the base currency and buying the quote currency), then you are actually trying to devalue the base currency and you will buy it at a lower price.
In trading terms, this is called “shorting” or “selling”. All you need to remember is that shorting = selling.
3. Forex Trading Bid, Ask, Spread
All forex trading quotes include two prices, the Bid and the Ask. The Bid price is always lower than the Ask price.
Here is an example:
The bid price is the level at which a trader will buy the base currency and sell the quoted currency at the exchange rate. In other words, the price is the level of the exchange rate at which you as a trader are willing to sell the base currency.
The ask price is the level at which a trader will sell the base currency and buy the quoted currency. In other words, the price is the level of the exchange rate at which the trader will buy the base currency.
The difference between the bid price and the ask price is the spread.
In this GBP/USD quotes, the bid price is 1.25644 and the ask price is 1.25560. Take a closer look at how traders arrange their buy and sell quotes.
If you want to sell the pound, you can click “sell”, which will sell the pound at an exchange rate of 1.25644. If you want to buy the pound, you can click “Buy”, which will buy the pound at an exchange rate of 1.26660.
In the following example, we will use fundamental analysis to help us decide to buy or sell a particular currency pair. We will cover fundamental analysis later in the article, but for now, try to understand what is happening.
- EUR/USD
In this case, the euro is the base currency, the “basis” of the purchase and sale.
If you believe that the US economy will continue to weaken, which is bad news for the US dollar, then you should execute a buy order on EUR/USD. In this way, the euro is bought in anticipation of its appreciation against the dollar.
If you believe that the US dollar economy will continue to strengthen and the euro will weaken relatively, then you should execute an order to sell EUR/USD. In this way, the euro is sold in anticipation of its depreciation relative to the dollar.
- USD/JPY
In this example, the US dollar is the base currency, the “basis” of the sale and purchase.
If you believe that the Japanese government will undervalue the yen in order to boost its export industry, then you should execute an order to buy USD/JPY. In this way, the US dollar is bought in anticipation of its appreciation against the yen.
If you believe that Japanese investors are withdrawing their investments from the US financial markets and converting the USD into JPY, then this will depreciate the USD, so you should execute a sell order on USD/JPY. In this way, as the dollar is expected to depreciate, the yen will depreciate and sell the US dollar.
- GBP/USD
In this example, the pound is the base currency, the “basis” of the sale and purchase.
If you believe that the UK economy is continuing to grow faster than the US economy, you should execute a buy order for GBP/USD. In this way, the pound is bought in anticipation of its appreciation against the US dollar.
If you believe that growth in the UK economy will slow down, while the US economy will remain strong, then you should execute a sell order on GBP/USD. In this way, the pound is sold as it is expected to depreciate against the US dollar.
- USD/CHF
In this example, the US dollar is the base currency, the “basis” of the sale and purchase.
If you believe that the Swiss franc is overvalued, then you should execute a buy order for USD/CHF. In this way, the USD is bought in anticipation of an appreciation of the USD against the CHF.
If you believe that the housing market bubble in the US will harm the economy in the future, and that will lead to a weakening of the USD, then you should execute a sell order on USD/CHF. In this way, you have sold the US dollar in anticipation of its depreciation against the Swiss franc.
Very helpful, thank you!