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Understanding Forex Rates

This article allows you to obtain a wider understanding of forex rates.

Forex Rates Purchasing and Selling

It is necessary for you to have a thorough understanding of quotes before you can commence trading.  You will normally receive a quote in pairs, such as the EUR/AUD.  The reason for this is that to purchase a currency, you have to sell a currency.  The purpose of the process is to buy the EUR/AUD and if the Euro was to strengthen against the Australian dollar, you would show a profit.

The first currency shown is the base currency.  The second currency is the counter or quote currency.  When you purchase a currency pair, the pair that you are quoted always indicated what it will cost to purchase a single unit of your base currency.  In you wish to dispose of a currency pair, the rate will indicate the amount of the quote currency you will receive when you sell a single unit of the base currency.  Regardless of whether you are buying or selling, the trade is normally based on the base currency.

Prices

The quote you receive will include a bid and an ask price.  The bid price is the value your broker is willing to offer to purchase your currency.  This means that you are able to sell your base currency at the quoted bid price.

The ask price quoted is the value at which your broker is willing to sell a currency.  This means that you are able to purchase the base currency at the ask price.

The spread between these two prices normally differs from one broker to the other.  This difference is the income earned by your broker.

Purchasing and Selling on Forex Rates

Your main reason for entering this financial market would be to make a profit.  This means that your intention is to purchase a forex rates when the price is low and sell a currency when the price is high.  When you dispose of your currency pair, you will be buying the second currency shown in your pair and disposing of the first one in the pair.

Long vs. Short

In the forex market, you can make gains regardless of whether the market is declining or rising.  There is no bias whatsoever as you would experience in the stock market.  If the market is in a decline, the profits you can make are high.  To take advantage of this, you need to understand how to trade whether the market is bullish or bearish.

Long

In the event that you decide to go long on your trade, a rising market would be preferable as you would be purchasing a currency.  This implies that you would have the opportunity to sell your position at an increased level to the amount you bought it at.  In this instance you would be purchasing the first currency in your pair and disposing of the second.

Short

In the event that you decide to go short on your trade, you would want to sell your currency pair.  In this case you would favour a market that is on the decline as it means that if you had to buy back your position, you will do so at a price lower than the one you sold at.  In this case you would be disposing of the first currency in your pair and purchasing the second currency.

 

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