How to Read a Forex pair
Currencies are always listed in pairs: EUR / USD or USD / GBP. Why is that? Because in every foreign exchange transaction, we are in the same time buying one currency and selling another. Example of currency quotes, the Euro against the US dollar:
The first currency in the quotation from left to right, is called the base currency (in this example, the Euro); the second currency is called the quote currency (in this example, the US dollar)
In our example, you have to pay 1.4745 US dollar to buy 1 Euro.
Base Currency – is the basis for purchases and sales. If you buy EUR / USD, it just means that you are buying the base currency and the euro at the same time selling the quote currency dollar.
To begin, you must decide what you want – to buy or sell.
Long position – is to buy
Short position – is to sell.
Bid and Ask
In any Forex quote you see two prices: the offer price and demand price – bid and ask.
The offer price is usually higher than the price of demand.
The difference between bid and ask is called spread (1.4746-1.4745=0.0001)
In the above quote EUR / USD, 1.4745 is the bid price, 1.4746 is the ask price.
GBP / USD
In this example, the pound is the base currency.
If you think the British economy will do better than the US economy in terms of economic growth, you would buy GBP / USD. You bought a pound in anticipation of its growth against the dollar.
If you make the assumption that the UK economy will slow down and the US economy will remain strong, then you would sell GBP / USD, – you expect a downward price pound against the US dollar.
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