How do we trade in Forex?

We sell or buy currencies in the Forex market, i.e. trade in currencies.

To Trade in the Forex market is simpler than you might have thought. The trade in the forex process in the Foreign Exchange market is quite similar to what we find in other financial markets — like the stock market. So, anyone with limited trading experience can quickly pick up the nitty-gritty (nuts and bolts) of the Forex Market.

And, even if you struggle, fret not, for we are here to make you understand. We will explain everything relevant to Forex Trading in the most straightforward language and simplify the fancy Forex concepts!

You are already aware that the main aim of Trading in the forex is to buy one currency for another in the hope that the currency you have purchased will appreciate against the currency you have sold.

Before we go any further, let’s ask what the meaning of “A currency appreciating against another currency” is?

Simple: to appreciate means to go higher in value.

If a good has appreciated in value, its value has gone up.

We buy a currency on the Forex market, anticipating an increase in value vis-a-vis the currency we have sold.

Example –

Imagine you have bought $100 at the USD/IND exchange rate of 75, which means you spent INR 7,500 to get hold of $100.

Now imagine that IND appreciates to 74 against a dollar a week later.

Let’s calculate the profit:

                                100*75 = 7500

                                100*74 = 7400

                                7500 – 7400 = 100.

 

 

Marketinvestopedia-How to trade in forex

Reading a Forex Trading Quote.

Before we discuss how to read a forex quote, Let us understand what a quote is.

The estimated price of a service is called its quote price. If, for example, the estimated price of a pair of shoes is $25, it means its estimated price is $25.

Now, Let’s understand how to read a Forex quote.

The price of a currency could be determined only in pairs. The reason behind quoting currencies in teams is that in a forex market, the act of buying and selling a currency happens simultaneously.

It This leads us to a fundamental question: if buying and selling a currency go hand in hand, how would we know which currency is being purchased and which is being sold?

To answer this question, we must wrap our heads around base and quote currencies…

 

What is a base and quote currency of Forex Trading?

We are sure you must have heard the word base, right? Basement, based, etc., what do these words mean? The base is something from which you start. Your starting point is your base point. You begin trekking up a hill from your base camp. Similarly, a base currency is a currency that is being used as a reference in a currency pair. To put it differently, base currency is the currency against which the price of another currency in the pair will be determined.

You can define quote currency yourself now. Quote currency is the currency whose value is relative to the base currency. As simple as that.

Let’s take an example to understand it graphically:

CAD/USD = 1.2524

The Canadian dollar on the left is the base currency against which the US dollar has been bid. The US dollar, on the right, is the quote currency, or the currency whose value in the above example has been determined in relation to the base currency.