FOREX EDUCATION: MARKET TYPES, SPREAD ETC.
Understanding clearly the importance of forex education, LiteForex aims to provide you with all necessary currency trading information. Continue reading for some prior forex knowledge.
Long / short forex
There are 2 different ways to trade on the forex market and many beginners (or those who even continue their forex education) are surprised to learn that they can actually make as much money when currency price moves down as when it goes up. Let's start with the most logical movement, when the price moves up. Most people are very familiar with the concept of buying something at a low price and selling it when the price increases. So the concept of buying the EUR/USD at 1.2150 and selling it at 1.2160 for a 10 forex pip gain should seem logical. This process is called going long. You can also do this in reverse! If you know that the currency price is more likely to go down rather than up, you can go short. This is just the opposite of the above transaction, selling it first and buying it back later in the hope that the price will go down for you to make forex profit. This may seem strange at first, but the concept remains the same either way. You always want to buy something at a low price, and sell it expensive. The consecution of actions doesn't matter. You must both buy and sell; as long as you sell at a higher price than you buy you make profit. Let us continue our forex education.
Forex spread
The difference between stock and forex markets is that broker commissions are either very low or zero. Forex brokers make money from the spread – a difference between the actual price and the offered price through a broker. On the left (side menu) you can see a typical board of currency pairs and their forex spreads. This one is taken from our feed this morning, and you can see the difference between the Offer (the price you can place on a sell order) and the Bid (the price you can place on a buy order) is 3 forex pips (spread). What does this mean to you though? Take a look at the board. If you bought the EUR/USD at 1.2158 as it is offered under the Offer column, and immediately sold it again before the price moved, you would only get 1.2155 as is shown in the Bid column. So the net result is -3 forex pips, or a loss to you, and a profit to the broker. Remember to always take the spread into account when placing a trade, setting targets and stop losses.
Bears & Bulls
Once started your forex education, you will constantly see the terms "Bears" and "Bulls" in books and chat rooms. These are terms that describe the general mood of the forex market. A "bear" market is when the general mood of the market is down, i.e. when there are more sellers than buyers in the marketplace. A "bull forex market" is the opposite, when there are more buyers than sellers and the general mood of the market is up. Forex is a place where bulls and bears struggle, and if you can identify who is gaining the upper hand, then you can identify the direction of the price. There are many more areas to cover; this should help those only starting forex education.
Calculating forex profit / loss
Forex market is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying with U.S. dollars, or you sell Canadian dollars for Japanese yen. The value of your forex investment increases or decreases because of changes in the currency exchange forex rate. These changes can occur at any time, and often result from economic and political events. Using a hypothetical forex investment, this article shows you how to calculate profit and loss in forex trading. Let's push your forex education to a new level together. To understand how the exchange rate can affect the value of your Forex investment, you need to learn how to read a forex quote. Forex quotes are always expressed in pairs. In the following example, your pair of currencies is the U.S. dollar (USD) and the Canadian dollar (CAD). The Forex quote, USD/CAD = 170.50, means that one U.S. dollar is equal to 170.50 Canadian dollars. The currency to the left of the "/" (USD in this example) is referred to as base currency and its value is always 1. The currency to the right of the "/" (CAD in this example) is referred to as the counter currency. In this example, one USD can buy 170.50 CAD, because it is the stronger of the two currencies. The U.S. dollar is regarded as the central currency of the forex market, and it is always treated as the base currency in any forex quote where it is one of the pairs.
This is part 2 of the article. Part 1.