Currencies Traded as Pairs
When you buy or sell a currency through a broker or dealer you are trading in pairs. Whilst this may sound like confusing to some, it is very simple once explained. “Pairs” are made up of two currencies. For example; you have the EURUSD which is the EURO and US Dollar. When you buy the EURUSD you are buying the Euro and selling US dollars. If you are buying you think that the EUR is strong compared to the US dollar. If you were to enter a trade on the EURUSD thinking that the EUR was weak compared to the US dollar, you would short the EURUSD. This is how all Forex pairs work. You are trading on the assumption one side of the pair is stronger or weaker than the other side of the pair.
Some of the major pairs are listed below:
Long or Short
When trading Forex you have two options. You can either enter a “long “position which means you are buying, or a “short” position which is selling. The easiest way to remember it is like this;
- Long – Buy
- Short – Sell
A lot of people come straight from trading stocks and have only ever bought a stock and tried to make money by selling once that stock has gone onto a higher price. In Forex it is just as easy to both buy and sell and to make money from either way. The same amount of profit can be made as if price moves lower as if it had moved higher, so looking for high probability “short” trades is just as good as looking for long trades. In many cases price will move a lot faster when it moves lower than what it does higher.
This gives traders a lot more options. Instead of watching a market trending down and not being able to make money from this, Forex traders can sell high and buy back low and make money the same as if they had bought low and sold high.
Bid and Ask
When looking to take a trade on a Forex pair the trader will be quoted two prices. These prices are known as the Bid and Ask. A picture of this is below.
The bid price is the current price in the market to buy this pair. This is also the same price that the broker is offering you to buy this pair. The ask price is the current price on offer to sell this pair from the market. This is also the price your broker is offering you to sell.
You will notice that there is a margin in between the bid and ask price. This gap in price is known as the spread. On every round trade you make you will pay the spread. The spread is a how the broker makes money from their traders making trades.
Brokers take their live prices from a live data feed which is normally a group of banks linked together. The broker then takes the live bank price and adds the spread to the price. From there they quote you the price you see on your trading platform.
Note: Quite often when opening an account a broker will offer traders the choice of two accounts. The first account will be an account with very tight spreads. Traders need to be aware of this account because whilst this account may offer tighter spreads, this account will often then charge commissions on every round trade placed on top of the spreads. The other account is often then the standard account that offers slightly larger spreads, but with no commissions. This is something that each traders needs to work out for themselves and which account they want to choose.
More on how brokers operate can be found in later sections including a very good broker that recommended for price action traders.