Trading Preschool Lesson 6 The Mechanics of Trading

Trading Preschool Lesson 6

Trading Preschool Lesson 6 – Full Lesson List:

  1. What is Bitcoin.
  2. Why Trade Bitcoin.
  3. Who Trades Bitcoin.
  4. When Can You Trade Bitcoin.
  5. How to Make Money Trading Bitcoin.
  6. The Mechanics of Trading.

The Mechanics of Trading

In Trading Preschool Lesson 6we demonstrate the object of trading digital currency, or any currency. That is, to exchange one currency for another, expecting the price to change. You want the currency you bought to increase compared to the one you sold.

Example:

Trader’s Action BTC ZAR
You purchase 10 BTC at the BTC/ZAR exchange rate of 1/6,900 +10 69,000
Two weeks later, you exchange your 10 BTC back into ZAR dollar at the exchange rate of 1/7,000 -10,000 70,000
You earn a profit of ZAR 1,000 0 +1,000 (PROFIT)

An exchange rate is the value of one currency against another. So, for example, the BTC/ZAR exchange rate indicates how many BTC you can purchase for one Rand, or how many Rand you need to buy one Bitcoin.

So, you are always buying one currency and selling another.

Trading Preschool Lesson 6

Left of the slash (“/”) is the base currency. To the right is the “counter” or “quote” currency.

In the example above, you have to pay 6,900 Rand to buy 1 Bitcoin. Or, you will receive 6,900 Rand when you sell 1 Bitcoin.

The base currency represents the “basis” for the buy or sell. If you buy BTC/USD this simply means that you are buying the base currency and, at the same time, selling the quote currency.

You would buy the above pair if you believed the base currency (BTC in this example) will increase in value, relative to the quote currency (USD, in this example). On the other hand, if you would sell if you thought the opposite.

Bid/Ask.

All exchange market have 2 prices; the “Bid” and the “Ask”.

Trading Preschool Lesson 6 a

The bid is the price at which another trader (buying) on the exchange is willing to buy the base currency (in exchange for the quote currency). So, the bid is the best available price you can sell at, on that exchange.

The ask is the price at which another trader (selling) will sell the base currency, in exchange for the quote currency. This means the ask price is the best price available for buying on that exchange.

The “last” price is simply the price at which the last bid and ask matched, creating a trade of one currency for another.

The difference between the bid and the ask price is popularly known as the “spread”.

In the above image example, a trader on the exchange is looking to buy (bid) bitcoin for 7,650 Rand. Another seller is looking to sell his bitcoins for 7,797 Rand. So the spread is 147 Rand (7,797 – 7,650 Rand). And the last trade between a buyer and seller on the exchange occurred at 7,650 Rand.

Trading Preschool Lesson 6 b

If you want to sell Bitcoin, you go to the sell column and you will sell Bitcoin at 7,650 Rand instantly. If you want to buy Bitcoin, you go to the Buy column and you will buy Bitcoin at 7,797 Rand, instantly.