When two currencies of different countries are exchanged one of them stands profited in the sense that, the amount of units increases while for the other currency the amount of units decreases. This profit and loss by mere exchange of currencies defines the concept of foreign exchange trading.
Currencies are expressed in short forms and they are always traded in pairs, for example, GBP/USD. From this pair you buy one currency selling the other. The base currency is the one which has more value. The currency with a lower value is called as quote currency or terms currency. When a pair of currency is quoted in forex following figures are mentioned in relation to the currency.
Rate of exchange of the currency will be mentioned. It is expressed with 4 decimal places, for example, EUR/USD = 1.2045.
Bid price or the price which the buyer offers to buy that particular pair of currency. It is the highest price offered for purchasing the currency.
Ask price or the sellers price is the price at which currency is offered for sale. It is the lowest price quoted for sale by the seller.
Bid and ask prices usually vary about 2 to 3 decimal places of the rate of exchange quoted. It can go beyond this range if the fluctuations are too steep. The units of difference between the bid and ask prices is termed as spread. The 1/1000th unit of the exchange rate between a pair of currency becomes a single pip.
You have to notice all these prices in a quotation to know how much the currency you bought or sold is fluctuating or is liable to fluctuate in future. These prices constantly keep on changing and monitoring them closely is the best way to know when is the right time to start and stop a transaction.
For short-term traders it is best to choose a single pair of currency and trade repeatedly in it rather than choosing multiple pairs. It helps them in finding out a technical pattern followed by the price movements. Currencies of richer economies dominate the market trade. They are higher in values and they are less prone to unexpected steep fluctuations. So it is best to trade in such currency pairs especially in short term transactions.
Forex is the only market where transactions are started and stopped within such a short time limit. The shortest deals in forex markets are executed within seconds. So the major factor in this market is not the duration for which you hold your asset. What matters is the timing at which you buy or sell a currency. The working of stock markets around the world has seemingly influenced forex currency rates to a certain limit. During most busy time zones prices tend to follow the trends which is popularly termed as “continuation”. After the market hours the prices tend to behave more unpredictably. This change in trends or reversals is also calculated by expert market players who try to make big profits during these times. Economical and political events also affect currency prices to a great extend.
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