In the forex market, we buy or sell currencies, with the aim of getting money (profits) from price changes. From this point of view, forex trading activities are actually similar to financial market transactions in general, such as stocks. If you already have experience in stocks, you should not have any difficulty in trading forex. However, you also can still trade forex even though there is no experience at all in other investments.
However, there are a number of striking differences between transactions on the forex market with the stock market or other markets. First and foremost, forex traders can benefit both when prices go up and when prices go down. Unlike the stock where we can only profit if the price goes up.
This is because, in forex, currency buying and selling are done in pairs. For example, if we buy a EUR / USD pair, we are buying Euros by selling US Dollars at the same time. In this case, we expect the Euro will strengthen higher in the future than now. And if that expectation really materializes, then the EUR / USD price chart will move up, and we can get money from forex trading.
On the other hand, if we sell EUR / USD, it means we sell Euros by buying US Dollars at the same time. We do this when we expect the US Dollar to strengthen even more than the Euro in the future. If that happens, then the EUR / USD price chart will move down, and we can still get money from forex trading even if the Euro exchange rate decreases.
Some Important Concepts in Forex Transactions
From the discussion above, of course, you can already conclude a number of basic concepts in forex. Well, in this section we will explain further.
Writing forex trading instruments are always written in pairs, such as EUR / USD, GBP / USD or USD / JPY. The reason is that in every foreign exchange transaction we simultaneously buy one currency and sell another. In one pair, the first currency listed to the left of the slash (“/”) is known as the base currency. Whereas the second currency on the right is called the counter currency.
Buy / Sell in Forex Trading
In forex trading, the most commonly used terms are buy (Buy or Long): If you think the value of the base currency will rise. Sell (Sell or Short): If you think the value of the base currency will go down.
Rate / Exchange Rates / Prices
Prices in forex trading are formed in international scale markets. The prices will be seen in the trading software provided by the broker for us to use as a trader, in graphical form. For example, as shown below:
The Difference in Supply and Demand Prices (Spread)
Bid Price is the price at which you as a trader will sell the base currency. Ask price is the price at which you as a trader will buy the base currency. The offer price is always lower than the demand, and the difference is often referred to as the Spread.
Close / Close Transaction
After you open a position in a currency pair, of course later you will need to also close the position to realize the benefits of forex trading. You do this by doing Close. So: If you originally Buy, to close means CLOSE (Sell). If you originally Sell, to close means CLOSE (Buy).