Buying and Selling. Bid and Ask

In the previous lessons, we have been talking about Forex prices as a single quote. In reality, there are actually two quotes for each price: the bid price and the asking price. 

A bid price and an asking price are typical for any financial product, from stocks to commodities and to Forex quotes as well. The bid and ask prices are always quoted in relation to the base currency. Brokers guarantee that the traders get the actual price for their transactions by having bid and ask quoted in real-time. 

The Bid is the best possible price at which the trader can buy the instrument that he is trading at that moment. When selling the base currency, the bid price is the price the dealer is willing to pay to buy the base currency from you.

The Ask is the best possible price at which the trader can sell the instrument being traded at the current time.  When buying the base currency, the asking price is the price at which the dealer is willing to sell you the base currency in exchange for the quote currency.

The bid price will always be smaller than the asking price, and you can see that in the example above.

Whichever currency is quoted first is always the one in which the transaction is being conducted. You either buy or sell the base currency.

Long Position – Buying

If you believe that the EUR/USD will rise, you would click “Buy”  and the trade will be triggered on the price of 1.2981. This is what traders refer to when saying they are “long”. A long position is when you have opened a trade and bought something, thinking of it as going up.

Short Position – Selling

If you believe that the EUR/USD will fall, you would click “Sell”, and the trade will be triggered on the price of 1.2983. What you have now is called a “short sell” position. You have actually sold something you don’t own, to buy it back at a smaller price and profit from the different price. So if you short sell a currency pair and the price goes down, you make money; if it goes up, you lose money.