Buying and Selling
As we have already mentioned, in the Forex market you buy or sell currencies. The objective of this market is that you exchange one currency for another with the expectation that the price (or exchange rate) varies so that the currency you bought increases of value compared to what you sold.
Here is an example to understand it better:
Currencies in the Forex market are quoted in pairs such as EUR/USD or USD/JPY. Why is it quoted in pairs? Because at the time of making a transaction, you are buying one currency and simultaneously selling another. Here’s an example:
EUR / USD 1.21587
One euro is worth 1.21587 dollars
The first currency, the one to the left of the bar [/], is called the base currency. The currency to the right of the bar is called the crossover currency. In this example, the base currency is the British pound and the crossover currency is the US dollar.
When one makes a purchase, the exchange rate tells us how many units I must pay off the cross-currency to acquire a unit of the base currency. Based on the example above, I need $ 1.7500 to be able to buy 1 British pound.
In the case of selling, the exchange rate tells us how many units of the cross-currency we will get by selling one unit of the base currency. Based on the example above, we will receive $ 1.7500 for every British pound sold.
The base currency and the crossover currency
To better understand how the quotation in pairs works we can see this example, if you buy EUR/USD it means that you are going to buy the base currency and at the same time sell the cross-currency (that is, I buy euros but at the same time I sell dollars).
If you think that the base currency (the euro in this case) will appreciate it, it will increase in value compared to the crossover currency, then you should buy the pair. In case you think the base currency will depreciate or fall relative to the crossover currency, then you may want to sell the pair.
The one you are buying
The one you are selling
All FOREX trades include two important prices, the BID price and the ASK price. The BID price is less than the ASK price.
The ASK or buy price represents the highest price at which the market is willing to sell you a financial instrument.
There is a difference between the BID price and the ASK price that is known as the spread.
ASK – BID = SPREAD
In the image we have an example on this topic:
A GBP/USD quote in which the BID price is 1.7445 and the ASK price is 1.7449, with a spread of 0.0004.
Why would you buy or sell a currency pair? Here are a couple of examples:
What does it mean to
go Long or Short?
When you want to buy a currency pair (buy the base currency and sell the crossover currency), you are waiting for the base currency to increase in value so that you can later sell it at a higher price. Traders know this as going long or taking a long position. In short, long = buy.
When you place a buy or go long, the price you pay is the ASK price. That is why when you open a purchase you will have a negative balance, since you are paying the ASK price which includes the spread.
When you want to sell a currency pair (sell the base currency and buy the cross-currency), you are waiting for the base currency to decrease in value and then buy it at a lower price. Traders know this as going short or taking a short position. In short, short = sell.
When you place a sell trade or go short, the price you pay is the BID price. That is why when you open a sale you will have a negative balance since you are paying the spread linked to the operation.