Things you should know before trading FX

Things you should know before trading FX

Every day roughly four trillion dollars changes hands on the foreign exchange market. That’s a lot of trading but before you jump in you need to understand how things are done on Forex.

pairs

 First and foremost, currencies on forex are traded through pairs: the base currency and the quote currency. In this case euros and dollars. Further then comes two numbers: the bid price and the Ask price. These are provided by a market maker or broker who handles the trade.

the bid

The bid prices represents how much of the quote currency you would receive if you sold 1 unit of the base currency.

the ask price

the ask price symbolizes how much of the quote currency need to buy 1 unit of the base currency.

the spread

The ask price tends to be slightly higher than the bid price. Consequently, most brokers only display the last two digits. The difference between the two numbers is called the spread. After that the money generally goes to the broker as a fee. So in this case, if you sold1 euro you’d give 1.4112 US dollars. And if you bought one euro you’d pay 1.4111 US dollars.

pip

Now one term you’ll hear a lot is a pip. Pip measures the increase or decrease of a currencies value. One pip is equal to roughly 0.0001 dollars depending on the currency being traded.

long position and short position

In addition, another set of terms is long position and short position. Taking a long position means that you’ve bought an amount of currency .taking a short position means you’ve sold it. Now how do you close a trade in forex? . First of all just because you bought a certain amount of currency doesn’t mean your trade is closed. In order to close a trade or close a position as it’s called. You need to buy or sell an equal amount of the open order thereby reducing the open position to zero.

However for example, if you bought a thousand euros. You said to be long a thousand euros. In order to close that trade, you must then sell a thousand euros. But it’s only when you close a position that you actually realize the gains or losses of that trade. And either gain or lose that cash in your account.

Finally, positions that are still open at the end of the business day can be rolled over to the next day in. What’s called a rollover swap where the broker actually closes the position. And then opens an identical position the next business day.