eToro – Forex Trading Forum

[Forex101]

As I explained, in Forex we buy or sell curencies.
The object of Forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase its value compared to the one you sold.

Example of making money by buying Euros
You purchase 10,000 euros at the EUR/USD exchange rate of 1.18 +10,000 -11,800*
Two weeks later, you exchange your 10,000 euros back into US dollars at the exchange rate of 1.2500. -10,000 +12,500**
You earn a profit of $700.

An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/JPY exchange rate indicates how many U.S. dollars can purchase one Japanese Yen, or how many Japanese Yen you need to buy one U.S. dollar.

How to Read an FX Quote
Currencies are always quoted in pairs, such as EUR/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the EURO versus the U.S. dollar:

EUR/USD = 1.4500

The first listed currency to the left of the slash ("/") is known as the base currency , while the second one on the right is called the counter or quote currency.So - you have to pay 1.4500 U.S. dollar to buy 1 Euro.

When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.4500 U.S. dollars For each Euro you sell.

You would buy the pair if you believe the base currency will go up relative to the quote currency. You would sell the pair if you think the base currency will go down relative to the quote currency.

Long/Short
First, you should determine whether you want to buy or sell.

If you buy , you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position". SO long = buy.

If you sell, you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". So Short = sell.


Bid/Ask Spread
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell.
The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price at which you will buy.

The difference between the bid and the ask price is popularly known as the spread.

For example, In eToro the spread for Eur/USD is 2 pips:

On this EUR/USD quote, the bid price is 1.4445 and the ask price is 1.4447.
If you want to sell EUR, you will sell at 1.4445. If you want to buy EUR, you will buy at 1.4447.

But surely now you must be asking - I don't have $10,000 in my account, how do I gain profits?

You can trade using margin trading. This is how you're able to open $10,000 positions with as little as $50 or $25.
Margin trading in the foreign exchange market is quantified in “lots”. I will explain more later but think of the term "lot" as the minimum amount of currency you have to buy. The lot size on eToro is $10,000 and it determines the minimal size of a position you can open according to the leverage - if you trade with X400 leverage you can trade as little as $25 (25X400=10,000), the same goes to X100 leverage and $100 (100X100=10,000) In Forex, you wouldn't be able to make money if you buy or sell $1 EUR, so they usually come in "lots" of $10,000.

THis is it for now, I hope it explained some things to those of you who were in the dark.

[annet1983]

great article, have a successful trading!

[monalisa803]

hi..........
it was a great article really informative...........