Start trading Forex: Tutorial Part 3

How You Make Money in Forex

In this part of the tutorial we will learn how we make money in forex. In the forex market, we buy or sell currencies.

Trading in the foreign exchange market is pretty simple. We simply exchange one currency for another hoping that price will change and the currency we bought will increase in value compared to the one we sold.

Ok lets see an example:

Traders action	EUR	USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.3700	+10,000	-13700
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.4300	-10000	+14300
You earn a profit of $600	0	+600

An exchange rate is simply the ratio of one currency valued against another currency. For example, the EUR/USD exchange rate indicates how many Euros can purchase one US Dollar, or how many US Dollar you need to buy one Euro.

 How to Read a Forex Quote

Currencies are always quoted in pairs, such as GBP/USD or USD/CHF. The reason they are quoted in pairs is because in every foreign exchange transaction, you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:

The first listed currency to the left of the slash ("/") is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).

Lets think the current GBP/USD rate is 1.6000 

When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.6000 U.S. dollars to buy 1 British pound.

When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.6000 U.S. dollars when you sell 1 British pound.

In simple Base currency is the basis for the Buy or Sell. Buying EUR/USD means you are buying Euros while simultaneously selling US Dollar. That means you are buying the Base currency and selling the Counter or quote currency.

Bid price/Ask price

"Why there are 2 prices?"

You will get quoted in 2 prices when you go to trade in Forex. One price is the Bid price and the other one is the Ask price.

The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. The ask is the price at which your broker will sell the base currency in exchange for the quote currency.

The difference between the Bid and Ask price is best known as Spread.

Going Long and going Short

Sometimes you will hear, "I am going long on EUR/USD", or, "I am going short on EUR/USD". What do they mean?

Traders are said to be “going long” when they buy a currency pair. To make it simple—"going long” EUR/USD means that you’re buying Euros with US Dollars.

Traders say “going short” when they sell a currency pair. Simply—"going short" EUR/USD means that you are selling Euros for US Dollars.

Hope you now understand what it really means by buying and selling in Forex. Now that you have the Basic understanding of how forex works we will go the basics of forex in the next lesson. So stay tuned.