Forex Buy and Sell – Forex Explained
Before you start trading Forex, you need to master the basics of Forex buying and selling. One small mistake due to some poorly understood mechanism, and you can lose all your money in a matter of minutes.
To give you a better picture of the Forex buy and sell process, we will compare it with the stock market. In a stock market, you buy stocks for a price, and then you sell them back with the expectation that the price has gone up. You then generate added value. If the performance of the security does not meet your expectations, all you have to do is take your capital losses or keep your securities for a longer period. When it comes to Forex trading, it works quite differently. Buying and selling are two essential concepts, and you must fully understand them before proceeding further in your learning.
Forex Buy and Sell Explained
Forex buy and sell only work in currency pairs. You are not buying the euro or the dollar, but dollars against the euro, the euro against the yen, etc. A currency has no intrinsic value in the market. It has a value against another currency.
Strict rules govern the position of currencies in pairs. The currency on the left – for example, in EUR/USD – is called the “base currency.” Its value does not vary. The currency on the right is called the “quote currency,” and it is this value that will vary according to market fluctuations. In our example, we know the amount of US dollars needed to get the euro.
In the Equity market, there is only one price: the price of the last trade. But in Forex, there are two prices: a buying price and a selling price for each pair of currencies.
What is a Spread?
Through Forex trading, Forex financial intermediaries earn from spreads and commissions. The cost of the transaction is the difference between the bid and the ask. That is called the spread. It represents the broker’s commission on the transaction in question. The broker is therefore paid exclusively on the spread.
Let’s see it in the example. Suppose that the EUR/USD pair has the following double quote: 1.5452-1.5453.
The bid (sell price) here is 1.5453: So I can only sell EUR/USD at 1.5453. The ask, which is the purchase price, is the value of 1.5452, so I can only buy EUR/USD at the value of 1.5452.
The difference between the bid and ask of 0.0001, represents the transaction’s cost or the spread pocketed by the Forex broker. It is essential to know that all brokers do not practice the same spreads on the same currency pairs. It is therefore strongly advised to consult several trading platforms before starting to trade.
When to Buy and Sell in Forex
Buying and selling currency pairs is anticipating the appreciation or depreciation of one currency against another. To determine when to buy and sell in Forex, you have to take several factors into account. Government instability and government reshuffles can affect the value of a currency. Also, when it comes to fundamental analysis Forex traders closely monitor data on employment, GDP, and monetary and fiscal policies. The economic calendar shows upcoming events that could shake up financial markets.
To determine when to buy and sell in Forex, you can rely on technical analysis and key levels (support and resistance), trends, and other indicators before positioning. Factors affecting Forex trading pairs can have significant impacts on your trading at times. It is, therefore, necessary to manage the adverse effects on your transaction by implementing the appropriate strategies and technical risk management.
