As we already know we are trading currencies and we are either going to buy or sell a currency. The equation is very simple, the aim is to exchange one currency for another currency with the expectation that the price will change. If the currency you bought increases in value compared to the one you sold, then you will have made money. Let’s look at this in more detail.

Foreign Currencies are always quoted in pairs, eg such as AUD/USD or USD/JPY. Remember you are trading money and you are simultaneously buying one currency and selling another. That is why they are always quoted in pairs.

The following example shows that one British pound will buy you $1.65 USD: GBP/USD = 1.6500

The first currency to the left of each pair is called the base currency, while the second one on the right is called the quote currency.

Buying and selling

Just like some other markets Forex allows you to take trades long (when you want the currency to go up) and short (when you want the currency to go down). When buying (going long), the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.6500 U.S. dollar to buy 1 British pound.

When selling (going short), the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.6500 U.S. dollars when you sell 1 British pound.

Base currency

If you buy EUR/USD this means that you are buying the base currency and at the same time selling the quote currency.

So therefore if you believe the EUR (base currency) will rise against the USD (quote currency) you would buy the pair. You would sell the pair if you think the base currency will depreciate (go down) in relation to the quote currency.

In all forms of trading there is the bid and ask price. Forex trading is no different. Think of the bid and ask like attending an auction of a house. The owner is going to be asking for a price (the ask) and the people attending the auction are going to offer a bid price (the bid). The bid price is always lower than the ask price.

The bid is the price in which the broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell.

The ask is the price at which the broker will sell the base currency in exchange for the quote currency. This means the ask is the price at which you will buy.

The difference between the bid and the ask price is the spread.

Before we calculate the profit and loss we need to be able to work out what the pip value is worth for the currency pair we are trading.

You do not need to work all this out yourself when you are trading, the platform will do this for you and the LTG GoldRock support team will also be there to guide you, but we are sure you will agree that it is vital information you should know before you trade real money with Forex.