To improve your trading performance and shed your newbie skin, start laying a solid foundation or strategy on which you can build. The stronger the foundation, the higher you can build. Here’s everything you need to understand about opening long and short positions, along with some powerful trading tips to help you make the most out of your trading time.
How traders do it
Let’s start simple. When a savvy trader performs fundamental or technical analysis, he or she is looking for a coming rise or fall with the aim to profit from the difference. For example, if you think USD is going to rise, buy it. If you think GBP is going to fall, sell it. Sounds simple. Let’s break down the Buy/Sell relationship before we move to the trading tips.
Buy (going long)
Imagine you’ve bought an old classic car for $3000. The car is sitting in your garage doing nothing. After the same car is featured in a Hollywood blockbuster, the market for that particular model explodes and collectors everywhere start buying it. The demand is high, the price rises and you end up selling it for $10,000. You bought at 3K, sold at 10K. You profited.
Trading works the same. Your goal is to find a currency that is available at a low price but has the potential to rise. Whenever something paints a positive picture for a particular currency, trading volume rises and the price follows.
Sell (going short/shorting)
The sell order is a little more complicated. How can you sell something you haven’t bought yet? Let’s say your friend needs help selling a TV. He’s asking for $400. You show the TV to someone, and they agree to buy it for $500. You then buy the TV from your friend for $400 and deliver. You profited from selling a TV that you’ve never owned.
Brokers offer the same opportunity with CFDs. You can sell a currency that you don’t own through the broker, but to close the trade you have to buy it later.
How brokers do it
If you’ve never traded before, Buy and Sell prices can seem a little confusing. Brokers offer CFDs (Contracts for Difference) to their clients. The clients or traders buy or sell these CFDs at the price the broker is offering. When buying a CFD, you pay the Ask price, when selling or selling back the CFD, you pay the Bid price. Here’s why brokers use Ask and Bid.
The Ask is the price the broker is asking for—what you will pay when you open a Buy order. You always pay the Ask price when you buy a contract. The Ask price is always higher than the Bid price.
The Bid price is the amount the broker is willing to buy or buy back a CFD for. You close a Buy trade by selling the CFD back to the broker at the Bid price.
Exness offers very low spreads, but what does that mean? Actually, it’s super important. Remember, the Ask price is always higher than the Bid price. The difference between the Ask and Bid is called the spread. A low spread means the currency price doesn’t have to move as much to become profitable for you. Let’s look at a trading strategy to clarify how you can profit from a trade.
Basic buy/sell strategy
Let’s talk pips (percentage in point). Since forex uses decimals to show movement, brokers calculate the difference using the smallest denominator—the pip. For example, if EURUSD moves from 1.1020 to 1.1021, the difference is 0.0001. In trading that’s a movement of 1 pip.
To keep things simple, here’s a buy order as an example. The trading conditions are as follows:
- Currency pair: EURUSD (Euro vs US dollar)
- Ask price: 1.1239 (the price you will pay when you buy)
- Bid price: 1.1237 (the price you will pay when you sell back the CFD)
- Difference/spread: 0.0002 (2 pips)
For you to profit in a Buy Order, you need the price rise to be strong enough to make the closing Bid price higher than the Ask price was when you opened the order. If an overall price increase raises the Bid price by 1 pip to 1.1238, you will still be in a negative, even though the price went up. So, how to increase your chances of a good result?
If the Bid price consistently goes over your opening Ask price, then profits are possible. If the average price fluctuates close to the Ask/Bid range, then potential profits will be very limited.
Two top tips:
- On your MT4/MT5 platform, right click on the Market Watch pane and select “Spread.” A third column will appear showing current Ask/Bid spreads for all currency pairs on your list. The lower the spread, the less movement needed to generate profits.
- Right click on the open chart, click Properties >> Common tab >> select Show Ask line.
Word to the wise
When buying a particular currency pair, consider the following:
- Is the daily high/low significantly outside of the Spread?
- Does the price chart indicate a pattern or rise?
- Does the financial media agree with your forecast?
- Is there a fundamental release coming that could support or contradict your forecast?
If you’re getting mixed messages from these four questions, then caution or a more detailed analysis is recommended. If you feel the risk is too high, simply don’t trade. You are not obliged to make trades every day. Think of it like buying fruit at the local market. If everything looks rotten, don’t put anything in your basket. Cherry pick the best trades and don’t keep them open too long. Think long-term and keep your overall balance in the positive.
Trade smart to make your trading journey long and fruitful
Not sure how to get started? No problem. Follow this step-by-step guide.