Forex Article 6

Profit With Forex Trading

You profit with forex trading through buying and selling foreign currencies. You trade one currency with a second, hoping for the second currency to gain in value when compared to the first.

Example of profiting with forex trading when purchasing euros.

You buy 10,000 euros at the EUR/USD exchange price of 1.35

Three days after, you trade your 10,000 euros back to US dollars at the exchange rate of 1.415

Therefore, you buy EUR 10,000 x 1.35 = US $13,500

And, three days after buying, you sell EUR 10,000 x 1.415 = US $14,150

Your forex trading profit is US $14,150 - US $13,500 = You earn a profit of $650

An exchange rate is just a ratio of one forex trading value next to a different one. For instance, the GBP/USD exchange rate shows the amount of British pounds to buy one U.S. dollar, or the amount of U.S. dollars you need to purchase one British pound.

Here's the way to understand a forex trading quote:

All forex trading is quoted in pairs. For example GBP/USD or USD/JPY. Why they're quoted in pairs is because with all currency trading deals you're simultaneously purchasing one and selling another. Here's an example with a forex trading price for the British pound against the U.S. dollar:

GBP/USD = 1.6114

All forex trading currencies on the left of the slash ("/") are regarded as the base currency. (In this example, the British pound). Whilst the other one to the right is named the counter or quote. (In this example, the U.S. dollar).

Here's what happens when you buy forex trading currency: The forex exchange price lets you know the amount you need to spend in units of the quote to purchase one unit of the base money. From the example previous, you need to spend 1.6114 U.S. dollars to purchase 1 British pound.

Here's what happens when you sell forex trading currency: The forex exchange price lets you know the number of units of the quote you obtain with trading one unit of the base money. With the example above, you'll get 1.6114 U.S. dollars whenever you sell 1 British pound.

The base is the "basis" for the buy or the sell. When you purchase EUR/USD this just means that you're purchasing the base currency and at the same time selling the quote.

You should purchase the pair should you believe the base trading money is going to go up in value relative to the quote currency. You should sell the pair when you believe the base money is going to go down in value relative to the quote money.

Long/Short

Initially, you ought to decide whether you'd like to buy or sell.

Should you wish to buy (which really means purchase the base money and also sell the quote money), then you'd like the base money to increase in value after which you would sell it back again at a higher value. With trading speak, this is referred to as "going long" or taking a "long position". Keep in mind: long = buy.

Should you desire to sell (which really means sell off the base money and purchase the quote money), you desire the base money to drop in price after which you'd buy it back again at a cheaper price. This is referred to as "going short" or taking a "short position". Short = sell.

Bid/Ask Spread

All forex trading quotes include a two-way value, the bid and ask. The bid is always less than the ask price.

The bid is the cost that the forex dealer is willing to purchase the base money in exchange for the quote money. Therefore the bid is the value at which you, the trader, will sell.

The ask is the value at which the dealer will sell the base money in exchange for the quote money. Therefore the ask is the value at which you'll purchase.

The difference between the bid and the ask cost is commonly referred to as the spread.

Let us take a look at an example of a cost quote obtained from a buying and selling platform:

With this GBP/USD quote, the bid price is 1.6354 and the ask price is 1.6357. See how this forex trading broker makes it easy for you to trade away your money.

When you intend to sell GBP, you click "Sell" so you may sell pounds at 1.6354. When you wish to purchase GBP, you click "Buy" so you will buy pounds at 1.6357.