This chapter starts with an explanation of how currencies are bought or sold in the market. We then decode a forex contract for long and short. The chapter also explains the three critical points in every trade and points out the bid/ask spread that brokers charge for each trade. This chapter also presents the four reasons that cause currencies to fluctuate on a daily basis. We then turn to the fraction theory, which helps us to decide on a long or short trade. The chapter ends with an explanation of how charts are read and how market structure is identified.
Forex traders make money by speculating on the movement of currency rates. There are only two ways to do this. The first way is to buy, expecting prices to rise. The second way is to sell, expecting prices to fall.
The current rate for AUD/USD is now 1.0325. You enter into a buy position because you expect the Australian dollar to strengthen further against the U.S. dollar. A buy trade is termed a “long position” in the forex market.
After three hours, the AUD/USD rate is at 1.0375. You were right, and you made 50 pips on this trade. Another way of saying this is that your long position took profit. Let’s have a look at Example 2.1 for an exact contract.