This article is intended to provide you with a good understanding about how to trade Forex professionally and profitably. This objective will be achieved by introducing you to a number of important Forex concepts, such as quotes, pips and lots. Once you have mastered these central ideas you will then have a solid foundation on which to launch your trading career.
Understanding Forex Quotes
You need to gain an appreciation of this parameter so that you can open Forex positions competently. Currencies are always displayed and quoted as pairs. This is because whenever you trade Forex and open a new position you must realize that this action entails the buying of one currency and the selling of another. The following diagram displays quotes for a number of Forex pairs.
For example, the above quote for the EUR/USD means that you could buy the EUR for 1.3230 or sell it for 1.3227. Consequently, your first decision that you need to determine when you plan to trade Forex is to decide which currency pair you intend to trade. For example, if you want to trade the Euro against the US Dollar then you must open a long EUR/USD position.
You can further break a currency pair into component parts. The first currency of a pair is termed the base currency. The second one is known as the counter currency.
In the above table, the GBP is the base currency whilst the USD is the counter currency. A Forex quote advises you of the amount of the counter currency you can purchase with one unit of the base currency. For example, in the above quote you could buy 1.5734 USD with one GBP.
Bid and Ask Prices
In the above diagram, the values 1.3227 and 1.3230 are displayed for the EUR/USD currency pair. The first number is the sell price and is termed the bid whilst the second is the buy price which is known as ask.
Lots and Pips
A pip is the abbreviation for Point in Percentage which you can use to calculate your Forex gains and losses. For example, if you hold a standard USD account then each of your pips is worth one dollar. A standard LOT is the equivalent to 100,000 units of the base currency.