Beginner’s Guide to Online Forex Trading – Chapter 5: How To: Trade Forex


Beginner’s Guide to Online Forex Trading – Chapter 5: How To: Trade Forex

Proper understanding of the way, currencies are quoted, will help a lot in trading Forex. In every Forex transaction, one has to buy a currency and sell another concurrently. Therefore, currencies are constantly quoted in pairs, like USD/JPYor GBP/USD. In case of GBP/ USD, the first one (GBP) is called the base whereas the second one (USD) is called the quote or counter currency.

The exchange rate, in case

of buying, refers to a quantity of quote currency in units to be paid in order to buy a quantity of base currency in units. For example, if a foreign currency exchange rate is quoted as GBP/USD = 1.7500, it means that a trader pays 1.7500 USD (quote currency) in order to buy 1 pound of British currency (base currency).

The exchange rate, in case of selling, refers to a quantity of quote currency in units that will be received by selling a quantity of base currency in units. Thus, if a trader sells one unit of 1 British pound (base currency), he would receive 1.7500 USD (quote currency). It has to be noted that the “basis” for buying or selling is the base currency. A simultaneous buy of EUR/USD can refer to a transaction where the base currency is bought and the quote currency is sold at the same time.

When the trader believes in an appreciation about to occur in the base currency as compared to the quote, he will buy the pair. And if he thinks that the base is about to depreciate in its value (go down) as compared to the quote, he will sell the pair.

How to: Go Long/Short

The terms ‘Long’ and ‘Short’ are used instead of buy and sell. Initially, the trader determines if he wants to sell or buy. Let’s assume that the trader wants to buy a currency (buy base and sell quote), he expects a rise in base currency’s value so that he can sell it at a price higher than the bought price. This is called taking a “long position” or “going long” in trader’s slang.

Now assume that he wants to sell a currency (sell base and buy quote), he expects a fall in base currency’s value so that he could buy it later at a price lower than the sold price. This action by the trader is called taking a “short position” or “going short”.

How to Bid/Ask Spread

All Foreign exchange quotes include bid and ask (two-way price). Normally, the value of the bid is lower than the value of ask.

Bid refers to the value at which the trader wants to sell the currency to the dealer who is ready to purchase the base in trade for the quote.

Ask refers to the value at which the dealer is ready to sell the base to the trader in trade for the quote. In short, bid is the selling price and ask is the buying price (in trader’s terms).

Spreads refers to the difference in value of bid and ask prices.


In the figure above you can see that the left column shows the currency pair and then you have the bid and ask prices. The spread is the difference between these two prices.

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