Forex Trading Jargons Part 1 - October 30, 2007
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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