Another set of words to be remembered when trading currencies are the words “bid” and “ask.” The dealer’s “bid” is actually the price he is willing to pay to buy the base currency in exchange of the quote currency. It therefore means that the bid is the amount at which you will sell. On the other hand, the “ask” is the dealer’s price at which he will sell the base currency for the quote currency. The “ask” therefore is the amount at which you will buy. The difference between the two is called the “spread.” If you already start forex trading, you will see how user-friendly this bid and ask process is as formatted by the forex trading. All the trader needs to do is click on the icons when he decides to either bid or ask or buy or sell and he is well on his way to the next transaction.
Now one would ask where he/she will base what currencies to buy or sell. Forex trading is not a game of cards wherein a lot is based on luck. Decisions on whether to buy or sell currencies are based largely on what is happening in the economies of the nation where the currency involved came from. It also depends on many factors that have direct or indirect effects on a nation’s economy. It is therefore important to be aware of what is going on and be vigilant of updates and news around the world, or at least of the news about the country whose currency you want to trade with. It is wiser however to generally have a knowledge of what is going on in the world for what happens in one country may have a domino effect and thereby affect other countries. The current recession for example is not limited to certain nations only, but the whole world.
To illustrate again, let us use USD/JPY this time. The base currency in this example is the U.S. dollar and the quote currency is the Japanese yen. The U.S. dollar therefore is the basis for the buy and sell. It is important for the trader to study the current economic situations of these countries to wisely make the move of either buying or selling. If you, as the trader, think that the Japanese yen is going to weaken since the Japanese export industry needs help, then it would be a wise move to execute a BUY USD/JPY order. This means buying the dollars thinking that the value will appreciate over the yen. If, however, your analysis brought you to thinking that the Japanese investors are taking money from the U.S. market and turning the dollars into yen, thereby hurting the U.S. dollar, then you should execute a SELL USD/JPY order. This means selling your dollars expecting that the yen’s value will go down.
For new traders who have a capital that is not too big and want to buy currencies, but do not have enough money, is trading still possible for them? The answer is yes. This could be done via margin trading. Simply put, margin trading is trading with the use of borrowed capital. It is trading on credit. It is through this technique that a trader with as little as $1,000 can open positions worth $10,000 to $100,000. Margin trading is quantified according to “lots” in the forex market. A “lot” is the minimum price of the currency you need to buy. In forex trading, it is not usual to talk retail, as in buying 1 dollar or selling 1 euro. Forex transactions are done in “lots.” To analogize, you do not buy a couple of grapes, you buy them in bunches. We do not usually buy one or two eggs; we buy them by the dozen. That is how you will use a “lot” in forex. Depending on the account you have, a lot is 10,000 for a mini account and 100,000 for a standard account.
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