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FX Basics – Reading Quotes, Long & Short Trades
Fx trading once studied,grasped and practiced can be both exciting and profitable. In fact a lot of pretty ordinary guys and gals are making sometimes extraordinary profits with fx trading. The problem for newbie traders can be the daunting process of getting to grips with some of the fx trading lingo and the seemingly odd concepts that surround it.
We’ll look at a couple of these in this article – first we’re going to dissect a forex quote so you can understand it, and then we’ll discuss the concept of going long or short on a trade.
How To Read An FX Quote – Many new fx traders sometimes struggle with understanding what a forex quote is trying to say. Let’s take a look at a forex quote and go through it logically:
EUR/USD – 1.2784
Notes on reading the above quote:
- Forex quotes are always offered in pairs. This is because you’re always trading one currency against another. So, in the above example the two currencies being traded in the transaction are the Euro (EUR) and the US Dollar (USD)
- The currency on the left side is commonly known as the BASE – the currency on the right is referred to as being the QUOTE one. In the above example, the Euro will be base and USD is of course the quote.
- When you see any fx quote, you’re being told how many units of the quote currency is required to buy one single unit of the base currency. So, In the above example we can see that it takes 1.2784 US Dollars to get one Euro.
- The choice you need to make as a trader is to decide whether to BUY or SELL the above quote. So, if you believe the base currency (Euro In the above example) is going to strengthen against the US Dollar, you would BUY the currency pair. If however you suspect the base currency is about to weaken against the quote currency, you would SELL the currency pair. Once you execute the forex trade, the movement of the currency pair will determine whether you make or lose money on the trade.
The Difference Between Long And Short Trades In Fx Trading
Rather than use the words “Buy” and “Sell”, FX traders commonly use the words “long” and “short”.
Let’s pull up the same quote as before:
EUR/USD – 1.2784
If we wanted to buy the base currency we would be going long on the above quote. When we do go long on this trade, we’re hoping that the Euro (base currency) will rise in value against the US Dollar (the quote currency).
Conversely, if we believed that the US Dollar was going to strengthen against the Euro, we would want to go short on the quote – in other words we would want to sell the base currency (Euro) against the quote currency (US Dollar).
These terms can get a little getting used to, but once you immerse yourself in fx trading information, courses and talk to your fellow forex traders on a regular basis, fx trading terminology becomes like a secret second language that only you and your trading colleagues can understand and speak.