[simple_series title=”Forex Beginners”]
You have learnt about how and what to trade on currencies. Now, let’s go on the next level which is still very easy to learn for beginners. Buying and selling currencies are the keys of forex trading and this is what traders do on the foreign exchange market. Traders should, at first, decide whether they want to either buy or sell.
It does not require a genius in placing a trade in the forex market because the trade mechanics are almost the same with methods on other kinds of market. This is why, many traders usually deal with more than just foreign exchange trading activities. The main goal of foreign exchange trading is exchanging one currency for another in which a trader will expect changing prices. In this case, the currency that they have bought can increase with the exact value as compared to the one he has sold.
Still find it confusing? Let’s make an example. You are a trader and you want to purchase 20,000 Euros at the exchange rate of 1.29877 (1.00 EUR = USD 1.298777).
Three weeks later, you want to exchange your 20,000 euros at the exchange rate of 1.350000 of USD. Let’s count how much you will get
You purchase +20,000 EUR with the value of USD 25975.54
You exchange -20,000 EUR with the value of USD 27,000
You can benefit 27,000 – 25975.54 = $1024.6
Such amount is an illustration though it can happen, depending on each country’s economic condition. This is the reason why you should be able to read a foreign exchange quote.
Foreign exchange quotes are always in pairs like EUR/USD, or GBP/JPY. This is definitely because traders buy one currency and sell another simultaneously in each forex transaction. Other common terms in foreign exchange trading are base currency and quote currency. Let’s make a glance at the previous example in which you want to trade EUR/USD = 1.29877. EURO is the base currency and USD is the quote currency.
When a trader buys, the rate of exchange shows the amount that a trader has to pay in the quote currency units to buy the base currency’s one unit. As refer to the example, the trader has to pay USD 1.29877 to buy 1 EURO.
When a trader sells, the rate of exchange shows the amount that a trader how to get in the quote currency units to sell the base currency’s one unit. So the trader will receive USD 1.29877 to buy 1 EURO.
The base currency is actually the buy or the sell ‘basis’ in which when a trader buys EUR/USD, it means that the trader buys the base currency and sells the quote currency simultaneously. The trader should buy the pair when he is certain that the base currency will gain value comparative to the quote currency. Its common term is ‘long position’, or ‘going long’. ‘Long’ means buy.
At the opposite, the trader should sell the pair when he is sure that the base currency is losing value comparative to the quote currency. Its common term is ‘short position’ or ‘going short’.
End of The Second Lesson. Be Ready with the Third One!