The forex traders trade in the forex market by buying or selling currency in the exchange of the another. This trade is done to make profits. The probability of earning a profit depends on the accuracy of market speculations done by the traders. To understand how the transactions are carried out, take a look at the examples below.
Example 1
A trader has 1200 USD in his account and GBPUSD exchange rate is 1.2000. With 1200 USD you will be able to buy 1000 GBP. The trader will be using the 1000 GBP for 1200 USD if he thinks that the value of the GBP will rise against the USD. Consider that the GBP rises up to 1.2200. The value of 1 GBP is now 1.2200 USD. So if the trader sells the 1000 GBP he bought to buy USD he will gain a profit. Now the trader will receive 1220 USD, hence making a profit of 20 USD.
Example 2
A trader is having 500 GBP. The GBPUSD exchange rate is 1.6000. The trader speculates that the GBP will fall against the USD and thus sold the 500 GBP for 800 USD. The exchange rate is now 1.5800. Now with the 800 USD, the trader will be able to buy back 506.32 USD. Now he has a profit of 6.32 GBP.
With speculating the market a trader earns profits by both selling and buying currencies.
Understanding the Currency Pairs and the Cross Currency Pairs
Currency Pair is the main instrument of the Forex. You can trade more than 100 pairs of currency. The major traded currency pairs are known as majors or major currency pairs. They make 66% part of the market. Examples of these are GBPUSD, USDJPY, EURUSD, USDCAD, etc. The USD is world reserve currency and thus it is found in all the pairs mentioned here. USD is found in almost all the pairs and the pairs that do not have USD are the cross currency pairs. The rate of the cross currency pairs is calculated with help of USD itself. If we are talking a cross currency pair like EURJPY, then exaction will be done as EURUSD to USDJPY.
In a pair the currency standing first is the base currency and the currency in second place is the quoted currency. If a pair is USDEUR, then it says that a trader is buying or selling the USD for the EUR that is present in your account. If a pair like USDEUR = 1.3000, it should mean that the cost of 1 USD will be 1.3 EUR.
Quotation and Pips
In a pair the quoted currency (that stands second) shows the ratio of the two currencies. This ratio is known as the quotation. If we see the example of a classic version, in a quotation you will see 4 decimals. The change in the quotation is known as pip. If the EURUSD is showing a quotation as 1.2000 and it has an increase by 1.2001, then currency rate increases by a pip or a point. In the NDD and ECN accounts, there are 5 decimal places instead of 4. There are 2 decimal places only in pairs of JPY. And if we see a pair with JPY in NDD and ECN accounts then you will see 3 decimal places.
Meaning Of Ask and Bid
The quotations are available in a table and looking at these tables, you will also see two rates quoted in front of every pair of the currencies. These rates are the buying and selling rates. The buying rate is the high one and it is called the Ask and the selling rate is the lower one and it is the Bid. There is another term “spread” and it is the difference between the buying (Ask) and selling (Bid) rates
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