by Randall Tavinosh Berke Tavinosh Randall Amateau
Pricing in the Forex market consists of the bid price and the ask price. Usually prices are in the brokers favor, as this is how he makes his money. The ask price will always be higher than the bid price, so when you trade on the Forex market, you end up buying high and selling higher.
When entering into a trade for a currency pair, you will pay the ask price. For example, with the popularly traded GBP/USD, if you think the pound is going to rise in price against the dollar, you would take a long position or buy the pound and sell the dollar, which is going to decrease in value against the pound. In this instance, the pound controls the trade and is termed the base currency.
The price that you wish to sell is the bid price. In the same example, suppose you think the dollar is now going to rebound and become strong against the pound. You would then be buying the dollar and selling the pound. But the base currency would still control the direction of the trade.
At the time of buying the cross currency or USD in the GBP/USD pair, the signals are reversed. This will result in reduction of the currency pair price. Because you are a seller, your interest is in a decrease in the price of the currency pair you sold, so that you are able to make a profit when you buy them back.
Calculations of the number of pips you earn over a short trade are the same as in a long trade to determine your actual profit. It is best to ignore the purchase or sale price and just figure out the difference between the higher number and the lower number, which will give you your gain or loss.
The spread is the difference between the bid price and ask price. This is the amount the broker will take as his commission. The broker makes money on the large volume of trades and not by charging large commissions.
Spreads are very competitive. The smaller the spread, the more money you get to keep. Brokers try to keep their spreads small to attract customers. Spreads among the more commonly traded currency pairs are usually smaller than others. Trading among the commonly traded pairs is what is known as Sticking with the majors.
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