What is Forex trading?
When you trade Forex, you simultaneously buy one currency and sell the other.
Hence the Forex trading is always quoted in pairs, example EUR/USD, GBP/USD etc. The first currency mentioned in the quote is called base currency, and the second one is the quote currency.
The price quoted indicates how much of the quote currency, the trader can buy with one unit of the base currency.
An example, if the currency pair EUR/USD is quoting at 1.0120, then you can buy 1 EURO for 1.0120 US Dollars. While trading Forex, there will always be quoted two prices for any currency pair.
They are Bid price and Ask price or Offer price.The Bid price is the price given if you want to sell the currency pair, and the Ask price is the price quoted if you want to Buy the pair. For example, for EUR/USD is quoted at a Bid price of 1.0120 and an Ask price of 1.0122.
The difference between the two is known as the spread.
Forex traders can make a profit by buying a pair at a low price, and then selling it at a higher price, or selling the pair high, then buying it at low.
The example in EUR/USD :
When US Dollar weakens, EURO gets stronger (with respect to Dollar).
Therefore, if the US is facing higher unemployment rate, the USD is likely to weaken.
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If you want to generate profit in this scenario, you need to BUY the EURO (at aks price – 1.0120 ), expecting it to appreciate against USD. Buying a position is also called LONG position.
In the alternate scenario of the lower unemployment rate, you should have sold the EUR/USD at the Bid price 1.0122, anticipating that EURO would get weaker and USD stronger.
This is called creating a Short position.