Difference Bid and Ask
So far, we talk about the price of foreign currency as a single quote. In fact, there are actually two quotations for each price. The bid price and the ask price.
The bid price is the price at which traders choose to sell. It also is the price at which the broker is willing to buy.
Asking price is the price at which traders choose to buy. It also is the price at which the broker is willing to sell.
The bid price is the price at which traders choose to sell. It also is the price at which the broker is willing to buy.
Asking price is the price at which traders choose to buy. It also is the price at which the broker is willing to sell.
The difference between the offer price and the ask price is the difference. The difference is the brokerage transaction costs charged for his services in trade.
In the following picture quotation USD/CAD is 1.33050 / 1.33071.
The figure shows that the offer price was 1.33050 and the ask price is 1.33071. We can also conclude that the difference is 2 pips. This means that the broker charge you 2 pips for each trade USD/CAD is executed on its platform.
If you believe that the USD/CAD will go up, you click "Buy" and the transaction will be triggered on demand price of 1.33071. If you believe that the USD/CAD will come down, you click "Sell" and the transaction will be triggered on an offering price of 1.33050.
There are three facts that we should note about the difference:
- The difference is the only transaction costs that arise in trading on the brokerage platform.
- The difference between the supply and demand are charged for each "round turn". This means that only 2 pips are charged for a transaction to buy first sell later, or sell first buy later.
- The smaller the difference, the less favorable market need for you to make a profit.
Usually, the difference between bid and ask liquid currency pair is smaller, while the currency pair is illiquid, showing the difference between bid and offer price is higher. Because every quote currency is always accompanied by the price of supply and demand. When you do buy position, you get in on the demand price and exit at the offer price.
The picture above shows an example. To gain 30 pips, the market should move 33 pips. With a price difference of 3 pips on GBP / USD, long positions carried at bid price 1.2386. To obtain a 30 pip profit, the market should move 33 pip pip to cover the difference paid to brokers. A buy position and ended with the offer price 1.2413.
Similarly, when you do sell position, you get to the exit at the offer price and the price of demand. In the image below, by a margin of 2 pips on EUR / USD, a sell position at the offering price of 1.07153. to get 30 pip profit, the market has to move 32 pips to close the difference is paid to the broker. Terminated short position at 1.0685 bid price. See the following picture:
What is causing the price of the currency to fluctuate?
Now we have a better understanding about how to make money in the forex market, let us look at the causes of the rise and fall of currency pairs.
Currency values up and down due to the forces of demand and supply. When the demand for a currency which exceeds the supply, the value of the currency is likely to rise. Conversely, if the supply of currency exceeded the demand, the value of the currency tends to fall.
Let's review the four most important factors that led to the price of the currency to fluctuate: economic factors, political factors, natural disasters, and speculation.
Economic factors
When the trader suffered economic factors, they were looking for the keys: growth. If there is no or negative growth, the value of the currency of a country tends to fall. This is because the currency is not considered attractive, and traders began to sell.
Conversely, if growth is positive, the value of that country's currency tends to rise. This is because more traders want to buy the money. Trader observed several economic factors to determine the performance of a country.
Let us observe:
Consumer
Everyone needs to shopping, spending on goods and services. Consumer spending directly influence the supply of money in a country, which directly influence the country's currency and its exchange rate with other countries. If the increased consumer spending, the economy in general will be more healthy, and demand for that country's currency will increase in value against other currencies.
Conversely, if the spending decreases, the economy will be weak and public sentiment against the currency will deteriorate. This led to the country's currency fell against other currencies
As shown in this report:
"The pound rose for a second straight day against the dollar after a report showed quarter economic growth more than expected rise in consumer spending, fueling speculation that the country will avoid a recession."
The Balance Of Current Account
Current account balances to measure how much money is flowing out of a country as Compared to the amount of money that went from a foreign source. When the inflow of funds a net country, the country has a current account surplus. When the flow of funding discharge of the net, has a current account deficit.
The continuous current account deficit could lead to a country experiencing a natural deficit. This is Because the money was used for trade, revenue and help leave the country for payment with a foreign currency. The current account is composed of three components:
The trade balance is the total value of exports minus the value of the total imports. Net income is defined as the difference between the money received and money spent. It covers Salaries, interest payments, and dividends. Unilaterally includes transfer taxes, foreign aid, as well as a prize in one direction.
For most countries, the largest component of the current account is the trade balance. For example, the United States Suffered a current account deficit is high during the last few Decades mainly because of the large trade deficit.
As stated in the report:
"The yen weakened after official data recorded a current account deficit of Japan in January. The yen slipped 0.3% to 81.33 per dollar from at 8:53 am in Tokyo. The yen fell 0.2% to 106.85 per euro. "
Political Factors
When a country mired in a political crisis, the demand for goods and services the country would be affected. This problem will cause the cessation of foreign capital into the country and also led to foreign capital leaving the country. The combined impact of this makes the country concerned currency weakened against other currencies.
The period of the election become clear also has major implications for a country's currency. Trader usually regard the election as an event that can cause instability and political uncertainties, which result in more volatility in currency values.
These effects are strongest when governments changed. The new government usually makes changes in ideology and management, the establishment of new rules, new laws, and new policies that ultimately affect the value of the currency.
Changes in currency values can be positive or negative. Political party that seeks to support the economic growth and limit the level of government debt tends to increase the value of the currency.
As stated in the following reports:
"On Wednesday, the Egyptian pound fell to its lowest level against the US dollar since January 2005, after the biggest anti-government process Hosni Mubarak's rule. The pound fell as low as 5.830 against the US currency. "
Natural Disasters
Natural disasters, such as earthquakes, hurricanes, and floods can bring a devastating effect on a country. Death, destruction of infrastructure, as well as sudden changes to everyday life. All of this gives negative impact on a country's currency.
Economic output will be greatly affected by the damage. Money that should be used to encourage economic initiatives are now channeled to rebuild supply and infrastructure.
The problem is compounded further by the decline in consumer spending and a loss of consumer and investor confidence. Ironically, other countries could benefit from this tragedy as soaring imports orders from the affected country. All these factors combined could have an impact on the country's currency.
As stated in the following reports:
As stated in the following reports:
"Australia's currency fell to its lowest level due to declining confidence in the growth prospects of the country, after the major floods in the state of Queensland. AUDUSD fell 0.5% to buy 99.6 US cents, add a drop of 2.5% this week. "
"New Zealand dollar declined in the Asian session on Tuesday after the occurrence of a major earthquake in Christchurch, the second largest city in New Zealand. NZD / USD fell from 0.7634 to 0.7550 continue to decline in value to below 0.7500. Level NZD / USD at 0.74 last time was recorded on December 28, 2011. "
"Indonesian rupiah fell to its lowest level in almost three weeks after the 8.7-magnitude earthquake in northwest Indonesia. The rupiah dropped 0.2% to 9205 per dollar, after rising 0.4% before the earthquake. Rupiah slipped to 9208, its lowest level since March 23. "
Fraction Theory
Let us learn the theory of fractions, which helps us ensure trade long positions or short positions. Let's examine the currency pair EUR / USD. We do not write with a normal quotation EUR / USD, but we write in fraction like this :
In this fraction, the numerator is the euro and the US dollar is the denominator. When the numerator becomes larger while the denominator remains, then the fraction is greater. This means that the euro gained for any reason. Currency pair EUR / USD is moving higher. The euro may strengthen due to various reasons, and I will explain in this blog.
Similarly, if the denominator becomes larger and the numerator remained. The whole fraction will become smaller. This means that when the US dollar strengthened due to any reason, the pair EUR / USD will move down. The core problem in the theory of fractions is the strongest currency pair with the weakest currency at any time.
When a strong currency in the numerator, we pair it with a weak currency in the denominator, we obtain a strong up trend. Our task in this regard is buying. If we pair with a weak currency in the numerator with a strong eye on the denominator, we obtain a strong downtrend. Our task in this regard is to sell.
Here are a couple examples of strong / weak.
On 3 April 2012, policymakers at the Federal Reserve (US central bank) announced that it will consider additional stimulus only if the economy lost momentum or inflation remains below the 2% target. This is contrary to the minutes of their meetings, which some policy makers assess economic need additional measures "immediately". The Minutes of the Federal Open Market Committee to be more aggressive than expected, and this makes the market by surprise, it reinforces the US dollar.
On the same day, Spain held a bond auction program. This auction event turned out to be a disappointing finish for Spain only able to sell 2.69 billion euros of the maximum target of 3.5 billion euros. Moreover, credit default transition Spain widened to 450 basis points, the highest figure for three months. These events weakened the euro.
By using fractional theory to explain these events, we can conclude that the euro weakened as a disappointing Spanish bond auction, and the dollar strengthened due to the aggressive attitude of the Federal Reserve. This combined action causes the drop in EUR / USD fell 300 pips in one day, see the following picture:
Similarly, when you do sell position, you get to the exit at the offer price and the price of demand. In the image below, by a margin of 2 pips on EUR / USD, a sell position at the offering price of 1.07153. to get 30 pip profit, the market has to move 32 pips to close the difference is paid to the broker. Terminated short position at 1.0685 bid price. See the following picture:
What is causing the price of the currency to fluctuate?
Now we have a better understanding about how to make money in the forex market, let us look at the causes of the rise and fall of currency pairs.
Currency values up and down due to the forces of demand and supply. When the demand for a currency which exceeds the supply, the value of the currency is likely to rise. Conversely, if the supply of currency exceeded the demand, the value of the currency tends to fall.
Let's review the four most important factors that led to the price of the currency to fluctuate: economic factors, political factors, natural disasters, and speculation.
Economic factors
When the trader suffered economic factors, they were looking for the keys: growth. If there is no or negative growth, the value of the currency of a country tends to fall. This is because the currency is not considered attractive, and traders began to sell.
Conversely, if growth is positive, the value of that country's currency tends to rise. This is because more traders want to buy the money. Trader observed several economic factors to determine the performance of a country.
Let us observe:
Consumer
Everyone needs to shopping, spending on goods and services. Consumer spending directly influence the supply of money in a country, which directly influence the country's currency and its exchange rate with other countries. If the increased consumer spending, the economy in general will be more healthy, and demand for that country's currency will increase in value against other currencies.
Conversely, if the spending decreases, the economy will be weak and public sentiment against the currency will deteriorate. This led to the country's currency fell against other currencies
As shown in this report:
"The pound rose for a second straight day against the dollar after a report showed quarter economic growth more than expected rise in consumer spending, fueling speculation that the country will avoid a recession."
Bloomberg Businessweek, February 24, 2013
The Balance Of Current Account
Current account balances to measure how much money is flowing out of a country as Compared to the amount of money that went from a foreign source. When the inflow of funds a net country, the country has a current account surplus. When the flow of funding discharge of the net, has a current account deficit.
The continuous current account deficit could lead to a country experiencing a natural deficit. This is Because the money was used for trade, revenue and help leave the country for payment with a foreign currency. The current account is composed of three components:
Current account = net income + trade balance + unilaterally transfer
The trade balance is the total value of exports minus the value of the total imports. Net income is defined as the difference between the money received and money spent. It covers Salaries, interest payments, and dividends. Unilaterally includes transfer taxes, foreign aid, as well as a prize in one direction.
For most countries, the largest component of the current account is the trade balance. For example, the United States Suffered a current account deficit is high during the last few Decades mainly because of the large trade deficit.
As stated in the report:
"The yen weakened after official data recorded a current account deficit of Japan in January. The yen slipped 0.3% to 81.33 per dollar from at 8:53 am in Tokyo. The yen fell 0.2% to 106.85 per euro. "
Bloomberg Businessweek, March 8, 2012
Political Factors
When a country mired in a political crisis, the demand for goods and services the country would be affected. This problem will cause the cessation of foreign capital into the country and also led to foreign capital leaving the country. The combined impact of this makes the country concerned currency weakened against other currencies.
The period of the election become clear also has major implications for a country's currency. Trader usually regard the election as an event that can cause instability and political uncertainties, which result in more volatility in currency values.
These effects are strongest when governments changed. The new government usually makes changes in ideology and management, the establishment of new rules, new laws, and new policies that ultimately affect the value of the currency.
Changes in currency values can be positive or negative. Political party that seeks to support the economic growth and limit the level of government debt tends to increase the value of the currency.
As stated in the following reports:
"On Wednesday, the Egyptian pound fell to its lowest level against the US dollar since January 2005, after the biggest anti-government process Hosni Mubarak's rule. The pound fell as low as 5.830 against the US currency. "
Routers, January 26, 2011
Natural Disasters
Natural disasters, such as earthquakes, hurricanes, and floods can bring a devastating effect on a country. Death, destruction of infrastructure, as well as sudden changes to everyday life. All of this gives negative impact on a country's currency.
Economic output will be greatly affected by the damage. Money that should be used to encourage economic initiatives are now channeled to rebuild supply and infrastructure.
The problem is compounded further by the decline in consumer spending and a loss of consumer and investor confidence. Ironically, other countries could benefit from this tragedy as soaring imports orders from the affected country. All these factors combined could have an impact on the country's currency.
As stated in the following reports:
As stated in the following reports:
"Australia's currency fell to its lowest level due to declining confidence in the growth prospects of the country, after the major floods in the state of Queensland. AUDUSD fell 0.5% to buy 99.6 US cents, add a drop of 2.5% this week. "
Market Watch, January 6, 2012
"New Zealand dollar declined in the Asian session on Tuesday after the occurrence of a major earthquake in Christchurch, the second largest city in New Zealand. NZD / USD fell from 0.7634 to 0.7550 continue to decline in value to below 0.7500. Level NZD / USD at 0.74 last time was recorded on December 28, 2011. "
RTTNews, December 22, 2012
"Indonesian rupiah fell to its lowest level in almost three weeks after the 8.7-magnitude earthquake in northwest Indonesia. The rupiah dropped 0.2% to 9205 per dollar, after rising 0.4% before the earthquake. Rupiah slipped to 9208, its lowest level since March 23. "
Bloomberg Businessweek April 11, 2012
Speculation
Speculators trade on the foreign exchange market only to make a profit. Basically there are two categories of speculators in the market: retail traders and hedge funds. On average 90% of daily trading volume in the forex market is speculative.
Step speculative sometimes called "smart money" or "hot money" because this step is the first step to get in and out of the country. For example, when speculators believe that the economy of a country has grown too rapidly, and in danger of overheating, they will sell the currency in anticipation of circulation by government policy. This will cause the supply of the currency exceeds the demand, resulting in a depression on the currency.
One of the most memorable speculative action in the foreign exchange market took place on 16 September 1992, known as Black Wednesday. On the fateful day, George Soros the currency speculators to bet massively against the pound, and managed to earn $ 1 billion. Two weeks before Black Wednesday currency speculators, including Soros, sold billions of pounds, hoping to buy them back cheaply and profit from the price difference.
The British government decided to intervene by raising interest rates 12%. The Treasury also tried to prop up the pound to spend £ 27 billion of reserves. However, the steps taken by the government proved futile.
On September 16 afternoon, the British Conservative government announced its withdrawal from the European exchange rate mechanism (ERM), acknowledges his inability to keep the exchange rate pound English / German marks at the lower limit of 2,778. A few hours after the announcement, the pound slumped 3% and fell by more than 12% in three weeks. In 1997, the UK Treasury estimated the cost of Black Wednesday reached GBP 3.4 billion.
Let us learn the theory of fractions, which helps us ensure trade long positions or short positions. Let's examine the currency pair EUR / USD. We do not write with a normal quotation EUR / USD, but we write in fraction like this :
In this fraction, the numerator is the euro and the US dollar is the denominator. When the numerator becomes larger while the denominator remains, then the fraction is greater. This means that the euro gained for any reason. Currency pair EUR / USD is moving higher. The euro may strengthen due to various reasons, and I will explain in this blog.
Similarly, if the denominator becomes larger and the numerator remained. The whole fraction will become smaller. This means that when the US dollar strengthened due to any reason, the pair EUR / USD will move down. The core problem in the theory of fractions is the strongest currency pair with the weakest currency at any time.
When a strong currency in the numerator, we pair it with a weak currency in the denominator, we obtain a strong up trend. Our task in this regard is buying. If we pair with a weak currency in the numerator with a strong eye on the denominator, we obtain a strong downtrend. Our task in this regard is to sell.
Here are a couple examples of strong / weak.
On 3 April 2012, policymakers at the Federal Reserve (US central bank) announced that it will consider additional stimulus only if the economy lost momentum or inflation remains below the 2% target. This is contrary to the minutes of their meetings, which some policy makers assess economic need additional measures "immediately". The Minutes of the Federal Open Market Committee to be more aggressive than expected, and this makes the market by surprise, it reinforces the US dollar.
On the same day, Spain held a bond auction program. This auction event turned out to be a disappointing finish for Spain only able to sell 2.69 billion euros of the maximum target of 3.5 billion euros. Moreover, credit default transition Spain widened to 450 basis points, the highest figure for three months. These events weakened the euro.
By using fractional theory to explain these events, we can conclude that the euro weakened as a disappointing Spanish bond auction, and the dollar strengthened due to the aggressive attitude of the Federal Reserve. This combined action causes the drop in EUR / USD fell 300 pips in one day, see the following picture:
Okay, the next post I will explain about reading charts and market structure.
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