The key to becoming a successful forex trader is to be able to understand the basics of currency exchange. Long before you start trading for real money, understanding currency exchange is vital to making the most of trading forex. There are some basic terminologies that will help make trading easy.
What Is Exchange Rate?
First of all every currency has its code that is being used to trade forex. For example, the American dollar will appear as USD while EUR will represent the Euro. All these currencies have been allocated by the International Standard Organization. The exchange rate is the rate at which one currency will be used to convert to another. This rate actually expresses the value of one currency to another. In Forex trading the exchange rate will always depend on whether one is buying or selling. The rates for buying and selling will differ greatly depending on the dealer who could be person, a bank or an ATM machine.
What Is Bid And Ask Price?
First of all understand that in forex currencies are paired. Since the essence is to change one currency to another, the bid and ask price are always based on the currencies that are paired. There are major and minor currencies. The most frequently used currencies in forex trading are the major ones which include, USD, GBP, AUD, JPY and CHF. The bid price is the price at which traders in the market will buy a base currency, while the ask price is the price at which traders will sell a currency. A forex quote appears with two figures separated by a slash. For example the forex quote for USD/GBP could be 1.333/.1.101. The first figure is the bid price and represents the amount a trader selling GBP will get in USD. The figure after the slash is the ask price that shows the amount a trader will pay if buying USD.
What Is Bid Spread?
The difference in the bid and ask price is known as the spread. It is usually called the pip and although the pip may appear very small, it may actually represent millions of dollars in gains or losses. It becomes possible for traders to reduce losses if bid/ask spread is lower. Generally the most important aspect in forex trading is buying and selling.
Buying Or Selling Currency
Unknown to many, in a forex transaction, you buy and sell at the same time. Buying a currency pair means buying a base currency and selling the other currency. In trading forex, you sell one currency to be able to buy another currency. The base currency goes from low to high if the exchange rate becomes higher. Buying means the base currency is being bought while the counter or quote currency is being sold. This is also referred to as going long. Selling refers to the selling of the base currency and buying of the quote currency also referred to as going short. It usually happens when there’s fear of a fall in the value of the base currency with respect to the quote currency.