The first thing you should know is that Forex is always quoted in pairs. The first currency is also known as the base. It is the one that you think will go up or down against the second currency, which is known as the quote.
Let’s take the example of EUR/USD pair. Euro is the base currency and the US dollar is the quote if the price of the EUR/USD pair is 1.06325 it means 1 euro is equal to 1.06325 dollars. If we think that the euro will strengthen against the US dollar then we place a buy trade, traders call this going long. For every point or pip the euro rises against the dollar we will make a profit. With the odd exception such as Japanese yen pairs, a pip is the fourth digit of the decimal point of the currency pair.
Read More About What is Forex – Foreign Exchange?
How to trade?
There are a number of different ways to trade Forex depending on the reign that you are based in. No matter how you trade Forex there are a number of benefits.
First, unlike traditional share dealing when you trade Forex you can sell a market known as going short. This potentially leads to making a profit from falling prices. Also, Forex is a leveraged product. This means you only need to deposit a small fraction of the overall value of any trade. This is the definition of margin. For example, if the margin requirement for a trade is 10 percent, then you need 10 percent the full value of the trade in your account to open the position.
Leverage is useful to traders because it means that they can put their money to use elsewhere. It can help to magnify your returns. But you should remember that it can works against you as losses will be magnified in the same way.
Finally, as Forex is the largest, the most liquid market in the world, spreads can be extremely tide. It will reduce your dealing cost. As Forex trading doesn’t take place on an exchange, it’s a market you can access 24 hours a day.
It’s worth noting that exchange rates can change rapidly in response to economic and political events. It will lead to big market movements relative to other asset classes. This combination of volatility and 24-hour trading means that while there is a lot of opportunities to trade currencies, there is also an increasing level of risk. So you need to make sure that you have appropriate risk management plan.
We Recommend You To Read More Forex Pips and Their Role in Trading
The Bid Price
When it comes to pricing in forex, there are three different prices that you should know about, bid price, ask price and last price. Let’s see what these mean.
The bid price refers to the highest priced buy order available in current market. The bid price is highly changeable as traders and investors act across the world.
If you place a bid order there’s no guarantee that you will receive the number of shares, contracts, or lots that you want. In order to complete a transaction in the market, it takes a buyer and a seller. So for the order to be filled and for the buyer to receive the shares, someone must sell to the bidder.
If the current bid on a stock is $10.05, a trader might place a bid at $10.05 or anywhere below that price. Then If the bid is placed at $10.03, all other bids above it must be filled before the price drops to $10.03 and potentially fills the $10.03 order.
If you place a bid above the current bid your order will hit the ask price and it will be filled instantly because your buy order interacted with a sell order. So if you want to enter a short position or exit a long position, you can sell to the current bid price. If sell order is equal to bid price it will execute.
Accordingly, traders have various choices with regards to setting orders. They can put an offer at or beneath the present offer. They can put in a request over the present offer that will potentially interface with move requests or restricted the bid/ask spread. Or on the other hand, they can utilize a market arrange. A market arrange takes any value it can discover to get a trader into or out of a position.
The Ask Price
The ask price is the slightest somebody will move a stock for right then and there. It, as well, changes as often as possible as traders respond and make moves. The ask price is a genuinely decent pointer of a stock’s an incentive at a given time. It is in spite of the fact that it can’t really be taken as its actual esteem.
Once more, there’s no guarantee that an offer will be filled for the number of shares, contracts, or lots the trader needs. Someone must buy from the seller so that orders can be filled.
In the event that a current stock offer is $10.05, a trader may put an offer at $10.05 or anyplace over that number. On the off chance that an offer is put at $10.08, every other offer underneath it must be filled. It happens before the price gets off to $10.08 and possibly takes care of the $10.08 order.
An offer put underneath the present bid will either limit the bid/ask spread or the request will hit the bid price. In this case, market will fix the order immediately because the sell order interacted with a buy order.
In the event that somebody needs to buy immediately, she can do as such at the present offer cost. A market buys order will execute at the offer price.
The Last price
Most of the charts that you may see about Forex are based on the last price. The chart refreshes with each difference in the last price. It’s conceivable to draw a chart using the bid or ask price also. However, you can simply change your diagramming settings likewise.
Think regarding the sale of some other asset. You’ve chosen to sell your home and you offer it at $350,000. You get an offer for $325,000. After much arranging, the deal closes at $335,000. The last price is the amount that the deal is closed on. It is not really what you would like to get for the property nor what the buyer wished to pay.
The last price is the latest transaction. However, in every case, it isn’t precisely the price that you would get if you somehow managed to buy or sell at this moment. The last price may have occurred at the bid or ask. Or the bid or ask price may have changed because of or since the last price.
The present bid and ask prices all the more precisely reflect what value you can get in the marketplace at this moment. However, the last price appears at what price orders have filled before.
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