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When you buy and/or sell a currency pair in the Forex market, you are not actually ‘purchasing’ or ‘exchanging’ the actual physical currency. Instead, you are opening up a ‘speculative’ position. When speculating or trading, everything is computerised and there is no change of currency. You simply see numbers on a screen that go up and down with either a profit or loss on your trades!

Around 85% of the volume of trades in the whole of the Forex market are purely speculative, with the rest being the actual exchanging of currencies for more everyday use like going on holiday or buying products overseas.

This means that when you are buying or selling a currency pair at a given price, you are speculating that the price of the currency pair will move in a certain direction, with the hopes of taking home a profit.

forex profitWhether the exchange rate has moved in your favour (or not) will depend on whether you have bought or sold a currency pair, also known as opening a ‘long’ (to buy) or ‘short’ (to sell) trade.

 

If you are opening a long position (buy) you will PROFIT when the price of a currency pair goes UP.

If you are opening a short position (sell) you will PROFIT when the price of a currency pair goes DOWN.

 

long position short position graph

Let’s take a look at some examples, to see whether you would make a profit or loss when you close your trade.

 

EXAMPLE 1

The EUR:USD has a price (exchange rate) of 1.1300 (1:1.1300).
You decide to open a long position (to buy). The price of the currency pair, then falls to 1.1295 and you close your position.

In this scenario, you will make a LOSS of 5 PIPs (more on pips in later lessons!).

 

EXAMPLE 2

The EUR:USD has a price (exchange rate) of 1.1290 (1:1.1290).
You decide to open a long position (to buy). The price of the currency pair, then rises to 1.1300 and you close your position.

In this scenario, you will make a PROFIT of 10 pips.

 

EXAMPLE 3

The EUR:USD has a price (exchange rate) of 1.1250 (1:1.1250).
You decide to open a short position (to sell). The price of the currency pair, then falls to 1.1240 and you close your position.

In this scenario, you will make a PROFIT of 10 pips.

 

EXAMPLE 4

The EUR:USD has a price (exchange rate) of 1.1220 (1:1.1220).
You decide you want to open a short position (to sell). The price of the currency pair, then rises to 1.1280 and you close your position.

In this scenario, you will make a LOSS of 60 pips.

 

BONUS:

The price at which a trader is buying a currency pair is known as the ‘ask‘ or ‘asking‘ price.
The price at which a trader is selling a currency pair is known as the ‘bid‘ or ‘bidding‘ price.

The difference between these two prices is called the ‘spread‘. The spread is the commission that brokers take.

LESSON SUMMARY:

– When trading in the retail Forex market, you are opening a ‘speculative‘ position

– Whether the exchange rate has moved in your favour (or not) will depend on whether you have bought or sold a currency pair, also known as opening a ‘long‘ (to buy) or ‘short‘ (to sell) position.

– If you are opening a long position (buy) you will PROFIT when the price of a currency pair goes UP.

– If you are opening a short position (sell) you will PROFIT when the price of a currency pair goes DOWN.

– The price at which a trader BUYS a currency pair is known as the ‘ASK‘ or ‘ASKING‘ price.

– The price at which a trader SELLS a currency pair is known as the ‘BID‘ or ‘BIDDING‘ price.

Lesson tags: free forex course
Back to: Free Forex Course > Step 1 - Introduction to Forex Trading
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