Foreign exchange, FX, currency market or simply Forex is the largest form of exchange in the world.
The goal is simple when trading in forex. You make profit out of selling a currency that you have bought for a lower price. The exchange rate between currencies, however, is decided in other currency and trade. When looking at exchange rates in forex, the first currency’s price is placed beside the second currency.
Similar to other trading, forex pair has a spread that comprises of a bid price – the lower end, where you sell and the offer price – the higher end where you buy.
In buying currency, the spread shows how much the price of the first currency is with the second currency. An example would be buying 1 EUR for 2 USD. The main idea is that you buy the currency if you believe you’ll be able to sell it for more than the amount you bought it for.
In selling currency, the spread shows how much the price of selling, the first currency is with the second currency. An example would be selling 1 EUR for 2 USD. The main idea is to sell the currency if you believe that the price of the currency you bought would fall against the amount you bought it for.
For example, you buy €10,000 for £8400. Then you see that the value of euro rises and choose to sell your euros to pounds again, so your €10,000 now becomes £8500. Your profit out of all of this is £8500 minus the amount you bought euro with which is £8400 which will net you £100.
Another example is, if you buy euro and believe that the value of euro would fall, and decide to sell it for the original price of £8400 for the €10,000. After that you saw that your prediction came true and the value fell lower than what you originally bought euro for, and you decide to buy €10,000 for £8300 – £100 less than your original buying price. Your profit from this is the £100 that you bought the euro for.