The forex trading is similar to commodity trading. For traders in the commodity market, there is selling and buying of assets such as gold or oil exchanging it for currencies. In the currency or forex trading, the assets which are sold and bought are the currencies. Because of that, unlike in the commodity trading, the value of each currency is normally determined relative to the other.
An example is whereby a currency trader in commodity trading will purchase gold and pay it in the USD, which creates what is referred to as a quote where the price of the metal gets defined in the currency which is another class of asset.
But when it comes to forex trading like what happens at cfd trading South Africa, the trader sells or buys Euro, paying it with another currency like the Swiss Franc, Australian dollars and much more, in which scenario, the quote that is created will have the same class of asset on both sides.
The result of such is impossible to speak of the actual value in the forex market as it is possible to value the Euro in Francs, dollars, or Yen, each being a choice which is valid as a value indicator. In such a case of commodities or stocks, the value can only be shown in the USD, thus, it is possible speaking of a value which is absolute.
Reading and understanding a currency quote
When you download and open the software of your preferred forex broker, the first thing that you are going to encounter is the price quote of the forex. The quote refers to the record of the transaction that was done previously where the currency pair was able to change hands. When the two actors in the financial field exchange their currencies, the price which the transaction was dealt at is referred to as a quote.
An example is a quote of EUR / USD 1.3524
From the above quote, the currency which happens on the left is the currency by which it was bought by the trader while the one which appears on the right is the one that it was sold to finance the purchase. The number is signifying the value which the currency got exchanged. Or to simplify it, when one Euro was bought, the value of a single Euro became equal to the 1.35 USD and there was a need of paying that amount of money in buying the currency.
Upon having to execute the trade, you will have to long the Euro and ensure to short the dollar – you bought the Euro and sold the dollar. In other words, you have a position which is open. The principle of the profit in the currency trading is the same as in all the other activities in trading. Buying cheap and selling expensive that is what the trade is all about.
On the other hand, you will need to wait for the value of the Euro to go above the 1.35, maybe at 1.38 where you will then close your position by having to sell the Euro and buy back the dollar and make some profit. Because the base value happens to be in dollar, then the profit will also be measured in dollars also.