In the first part of this article, we talked about the basics of making money with forex trading. We also discussed how currencies in the trading market are quoted in pairs and the terms used to describe them – that is base and quote currencies. If you missed it, click to read A Guide to Making Money with Forex Trading – Part 1.
With that out of the way, in this part, we will look at other basic things you need to understand when it comes to foreign exchange trading. These includes the terminology such as Long/ Short and Bid/ Ask. However, before we go any further, remember (from part 1) that the base currency is the “basis” for buying or selling in forex trading and if you buy EUR/USD it simply means that you are buying the base currency and simultaneously selling the quote currency. And, the best time to buy a pair is if you believe the base currency will appreciate in value relative to the quote currency; and you would sell the pair when you think the base currency will depreciate relative to the quote currency.
Long / Short
Keeping the points made earlier in mind, the term “Long” or “Long Position” is used to describe when a trader buys a base currency with an anticipation that he/ she would sell it back at a higher price in future. To remember this strategy, it is easier to use “long = buy”.
On the other hand, the term “Short” or “Short Position” is used to describe when a forex trader chooses to sell off (i.e. sell the base currency and buy the quote currency) when the base currency falls in value; all with the hope that he/ she would buy it back at a lower price later. Contrary to the Long, this one can easily be remember as short = sell.
Bid / Ask
All forex trading quotes are made with two prices, namely: Bid and Bsk. Most often than not, the Bid price is lower than the Ask price. The bid is the price at which your foreign exchange broker is willing to buy the base currency in exchange for the quote currency. This is the best available prices at which traders like you will sell to the market. On the other hand, the Ask (otherwise known as the Offer Price) is the price at which the forex broker will exchange the base currency for the quote currency. To you, this is the best available price at which you can buy from the market.
The difference between the bid and the ask price is popularly known as the Spread.
