A Simple Currency Trade
Although the foreign exchange market plays a pivot role in the world’s economy, it can also be utilised to make a handsome profit for individual FOREX traders. Moreover, with over $1 trillion dollars worth of trades taking place each and every day, there’s more than enough profit to go around for everyone. But, before you can jump in and start to make any profit from FOREX trading, you need to know something about the mechanics of how simple currency trade take place.
The spread
The spread is the difference a broker has between their ‘buy’ and ‘sell’ price (more accurately known as the ‘bid’ and ‘ask’ price) in a currency. So, for example, if you want to trade $s for £s, the quote you may be given will depend on whether you want to be selling $s and buying £s or buying $s and selling £s. The difference between the spread is how the broker makes a profit and, as such, different brokers quote different spreads. Consequently, it is always worth doing a check around to see what different spreads brokers are offering on their currencies before executing a trade.
The base currency and the counter currency
Simply put, the base currency is the first currency in a trade quote; and the counter currency is the second currency in a quote. So, for example, if you are trading in $s and £s and have been quotes $1.70 = £1, then the base currency will be the $s and counter currency will be the £s.
Currency movements
When you hear that the quote for your base currency has increased, effectively what this means is that the value of your base currency has increased and you have made a profit. So, looking at the $ / £ example again, if you hear that the ‘bid’ / ‘ask’ price has now moved to $1.65 = £1, you know your base currency has increased in value and now might be a good time to sell. Conversely, if the quote for you base currency has decreased, for example to $1.90 = £1, this means you are currently losing money and may want to ‘hold’ your position in the hope of a return or sell in the hope that you do not sustain further loses.
Executing the currency trade
To execute the currency trade all you need to do is ask your FOREX broker what their bid and ask prices are for your base currency and counter currency and then, using your FOREX analysis technique, determine whether you think the base currency is like to increase or decrease in value. Once you have determined these factors, execute the foreign currency trade you want to make in line with maximising your potential profit return.