Forex Trading Made Easy

Long/Short and Bid/Ask Spread

In this part, we want to talk about several jargons used in forex trading, Long/Short, and Bid/Ask Spread. Basically, these are related to buy or sell decision. If you are buying, which means you are buying the base currency and selling the quote currency. (We learnt this in the previous post), it is a “long position”. In other words, we are buying and hoping or anticipating that our base currency would rise in value. In short, Long = Buy.

If Long = Buy, Short naturally means to sell. You are right! Taking a “short position” means that you are selling the base currency and buying the quote currency. This decision is based on you thinking that the base currency would drop even lower so that you can buy it back at a cheaper price. So Short = Sell.

You need to understand what the Bid/Ask Spread is. Forex quotes come in a 2-way pricing, the bid price and the ask price. The bid is always lower than the ask price. Why?

The bid is actually the price that the dealer/market is prepared to pay to buy the base currency in exchange for the quote currency. The bid price is also the price that you the trader has to sell. Likewise, the ask price is the price at which the dealer is willing to sell the base currency in exchange for the quote currency. Similarly, this ask price is what you the trader will buy. The difference between the bid and ask is the “spread”.

Now, it is time for an example using the GBP/USD quote.

The bid price is 1.7440 and the ask price is 1.7444. If you want to sell GBP, you will click on “Sell” or “Short” GBP at the bid price of 1.7440. In other words, you are selling 1 British Pound for 1.7440 US dollars. If you want to take a “long position”, ie to buy GBP, you will pay 1.7444 US dollars to buy 1 British Pound.

If this is too complicated, always remember this: the market always gains more and we always pay more. So if you are buying 1 British Pound and you see the quotes 1.7440/1.7444, you are paying the “more expensive” price which is 1.7444 US dollars. If you are selling 1 British Pound and you see the quotes 1.7440/1.7444, this means the dealer will only “return” you 1.7440 US dollars. Clearer now?

Let us take a break here. In the next post, we will look at other forex trading jargons like pips, margin, leverage and transaction cost. If you are an experiencd forex trader, why not take a look at this powerful forex trading software that can boost your profits instantly?

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Forex Illustration – Base and Quote Currencies

We have explained earlier that Forex is essentially buying one currency and selling another. Just like the stock market, the buying and selling mechanism in forex market is simple. Anyone should be able to pick up quite quickly.

Similar to stocks, you exchange one currency for another in anticipation of a price change. Since you are trading in currency pairs, when you buy currency A, you hope that currency B will drop in value against currency A.

A simple example here – the EUR/USD indicates how many US dollars one Euro can buy.

How to Read an FX Quote?

Currencies are quoted in pairs such as USD/JPY and GBP/USD. When you buy one, you are actually selling another. Take for example the currency pair British pound sterling versus the US dollar. GBP/USD = 1.7400. The first currency to the left of “/” is the base currency (the British pound) and the currency to the right of “/” is the quote currency (US dollar in this case).

When you buy, the exchange rate tells you how many units of the quote currency you need to pay to buy 1 unit of the base currency. In this example, you have to pay 1.74 USD to buy 1 British pound.

When you sell, the exchange rate tells you how many units of the quote currency you will get for selling 1 unit of the base currency. Using the same example, you will receive 1.74 USD when you sell 1 British pound.

When you indicate “buy” for the EUR/USD pair, this means you are buying the base (EUR) currency and selling the quote currency (USD). You would buy this pair if you think that the base currency, EUR would appreciate versus the quote currency (USD). Likewise, you would “sell” the EUR/USD pair if you think that EUR would drop versus the USD.

It does not sound too complicated right?

There is a forex trading software that comes complete with a step by step manual on how to trade forex. In fact, it tells you exactly what to buy and when to buy the currency pair. It works even for a novice forex trader. You do not need any information as the forex trading software works it out for you but as always, know what you are doing.

Did you know that you can take a look at the forex trading software here at ForexTrading-MadeEasy.com?

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Forex Trading Regulations - Where the Trend is Going…

Currency or forex trading was very much an entitlement or privilege of corporations and banks until the 1960 - 70s when things start to evolve. Now, even the man on the street can trade forex easily.

You may wish to understand a little bit about the history of forex trading and its background so that you can understand why certain regulations are put in place and why they are made in the first place.

Key events of forex took place in 1972, 1973, 1978, 1994 and 2002.

In 2002, Euro became the official European currency of Austra, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.

The trend in forex regulation is leaning in the direction of cash/spot currency markets. As such, being a trader, whether as a private individual or working for a forex trading company, you need to study the moves and monitor what is happening at the Commodity Futures Trading Commission CFTC and National Futures Association NFA. This is how the experts do it, so do not miss this tip from ForexTrading-MadeEasy.com!

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For those who are not only interested in forex trading made easy tutorials but the history of forex trading, here is a chronology of the forex history marking major events that took place:

1913 - US Congress created the Federal Reserve System

1933 - Congress passes the Securities Act of 1933 to counteract the 1929 Great Crash

1934 - The Securities Exchange Act of 1934 saw the creation of the Securities and Exchange Commission

1936 - Commodity Exchange Act was legislated to stabilize the futures market

1944 - The Bretton Woods Accord was established to stabilize world economy after the World War II

1971 - The Smithsonian Agreement was established to allow for currency fluctuations

1972 - The International Monetary Market was established as part of the Chicago Mercantile Exchange

1972 - The European Joint Float was created as the European community sought to rely lesser on the US Dollar

1973 - The Smithsonian Agreement and European Joint Float failed and resulted in a switch to a free floating system of currencies

1974 - The Commodity Futures Trading Commission was formed as a regulatory body for the futures and options markets

1978 - The European Monetary System was created to firmly alienate itself from over-reliance on the US Dollar

1978 - Free-Floating System was officially set as mandatory by the International Monetary Fund, IMF

1993 - The European Monetary System fails to make way for a global free floating currency system

1994 - Online currency trading takes place

2000 - Commodity Modernization Act sets the new rules and regulations for securities derivatives as well as currencies in futures

2002 - The “Euro” debuts as the official currency of 12 European countries on 1 Jan

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Here at ForexTrading-MadeEasy.com, we list down the reasons why people are trading with forex.

1. No commissions

There are no clearing fees, exchange fees, brokerage fees and government fees when you do forex trading.

2. No middlemen

You interact directly with the market responsible for the pricing of each currency pair without going through any middlemen.

3. Low transaction cost

The retail transaction cost or what we are familiar with as bid/ask spread is small and generally less than 0.1 percent under normal market conditions. Dealing with larger forex dealers can almost always ensure that this spread is lower. It can be even lower than 0.07 percent.

4. No fixed lot size

Forex trading can be made easy since you are not dealing with a fixed lot size each time you trade. This is different from futures market where you may be trading silver in lots of 5000 ounces where each contract lot can cost you $30,000 quite easily. In forex trading, you can start trading for as little as a couple of hundreds with mini forex trading accounts.

5. High liquidity

Liquidity in stocks is one killing factor. If you are stuck with a stock which does not have a high buy/sell volume, you may not be able to sell it even if you wish to. Forex trading on the other hand makes it easy for you to liquidate and enter and exit from any position. Cutting losses or making gains can take place within seconds.

6. Instantaneous transactions

Since the forex trading market is a liquid one, you can close your deals very quickly.

7. High leverage, low margin

So far, only forex trading can provide such a high level of leverage where you can multiply your profits many fold with very little investment.

8. Convenience and easy accessibility

Online forex trading is easy and straightforward with online portals like Easy Forex.

9. No single external factor can affect the market

Since the entire volume of Forex markets is so huge, almost no single factor can swing the market. Central banks with its massive financial might are unable to influence the entire market much. This is important since as a private investor in forex trading, you do not want to be at the mercy of rogue corporations.

10. No insider trades

The sheer size and non-centralized forex market do not allow for insider trades to happen. Like what was said, central banks have limited influence, let alone individuals.

You may wish to open a mini forex account at Easy Forex and experience first hand how to trade forex.

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There are several factors that affect currency prices, mainly economic and political. But the most crucial ones that directly impact the currency prices are the interest and inflation rates, international trade figures, and the political stability of each country whose currency is traded. Governments and central banks do get involved in the FOREX market to influence the currency values. These are done by either pouring their domestic currency into the markets to lower the currency price or buying to raise it. These are meant to stabilize the currency.

At times, large market orders due to market forces, or speculation could also create a price volatility. However, given the gigantic volume of FOREX daily, it is quite impossible for any one factor to strongly affect the market either in a upward or downward trend for a sustained period.

Here at ForexTrading-MadeEasy.com, we encourage you to keep yourself abreast with world news to understand what macro-factors could be affecting the way the FOREX prices move.

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As long as the currency is backed by an existing country, it can be traded at the large brokers. Major currencies traded are the US Dollars (USD), the Euro Dollar (EUR), the Japanese Yen (JPY), the British Pound Sterling (GBP), the Swiss franc (CHF), the Canadian Dollar (CAD) and the Australian Dollar (AUD). Other currencies are what we call minors or minor currencies.

Take note that symbols of FOREX currency are always 3 letters where the first 2 characters represent the country name and the 3rd represents the name of the currency. For example JPY - JP represents Japan, and Y represents Yen.

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Foreign exchange (FOREX or FX) is a transaction that involves the simultaneous buying of one country’s currency and the selling of another. These currencies are often traded through a broker and executed in currency pairs such as the EURO/USD or GBP/JPY. As of now, the FOREX market’s net daily volume dwarfs the combined total volume of stocks and futures markets.

FOREX can be traded round the clock ie 24 hours since it is operated through an electronic network of banks, corporations both huge and small and private individuals. This is the beauty of forex trading.

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The Foreign Exchange (FOREX Or FX) market is the largest financial market in the world now, with a volume of well over $1.9 trillion a day. This is more than triple the combined value of stocks and futures markets. This investing tool was available for decades only to banks, large multinational corporations (MNC) and financial institutions.

It was until 1995 that the widespread use of computer and a new era of online communications - the Internet age opened the doors of FOREX trading to everyone like you and me. FOREX trading offers an unmatched potential for immense profits and huge gains be it in a downturn or a bull run. As long as you have a computer and an internet connection, preferably a broadband connection, and armed with the information in this website “Forex Trading Made Easy“, you are ready to take on forex trading for comfortable profits.

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