The spread
The spread is the difference a broker has between their ‘buy’ and ‘sell’ price
(more accurately known as the ‘bid’ and ‘ask’ price) in a currency. So, for
example, if you want to trade $s for £s, the quote you may be given will depend
on whether you want to be selling $s and buying £s or buying $s and selling £s.
The difference between the spread is how the broker makes a profit and, as
such, different brokers quote different spreads. Consequently, it is always worth
doing a check around to see what different spreads brokers are offering on their
currencies before executing a trade.
The base currency and the counter currency
Simply put, the base currency is the first currency in a trade quote; and the
counter currency is the second currency in a quote. So, for example, if you are
trading in $s and £s and have been quotes $1.70 = £1, then the base currency
will be the $s and counter currency will be the £s.
Currency movements
When you hear that the quote for your base currency has increased, effectively
what this means is that the value of your base currency has increased and you
have made a profit. So, looking at the $ / £ example again, if you hear that the
‘bid’ / ‘ask’ price has now moved to $1.65 = £1, you know your base currency has
increased in value and now might be a good time to sell. Conversely, if the quote
for you base currency has decreased, for example to $1.90 = £1, this means you
are currently losing money and may want to ‘hold’ your position in the hope of a
return or sell in the hope that you do not sustain further loses.
Executing the currency trade
To execute the currency trade all you need to do is ask your FOREX broker what
their bid and ask prices are for your base currency and counter currency and
then, using your FOREX analysis technique, determine whether you think the
base currency is like to increase or decrease in value. Once you have
determined these factors, execute the foreign currency trade you want to make in
line with maximising your potential profit return.
