Working with Forex is only buy a currency and sell other in ground to the estimates that can increase and decrease their value.
We can understand better with an example how we can earn or lose (according to circumstances) through this transaction.
We can think a change EUR/USD (cross) to 1.5515, that means one euro is about 1.5515 dollars, so if we buy one euro, we will have to pay 1.5515 dollars, but on the contrary, buying dollars by selling euro is worth more, because we will receive 1.5515 dollars.
Well, after the change we must wait for a variation on market about the cross euro/dollars.
If we buy euro through the sale of dollars (long) and the value of cross increase to 1.5530, we will can choose to close the position, so we have earned 15 points (1.5530 – 1.5515 = 0.0015 x 10000 = 15).
If we had decided to sell 1.5550 and the value had decreased , we would have lost 15 point.
The points are also called pips.
On the contrary if we had bought dollars by the sale of euro (short), we would have lost 15 pips (if the value of euro had increased), and we would have earned if the value of dollar had increased.
Long or short mean that:
we are in long when we believe the value of the base currency (in this case euro) will increase, we are in short when the value of the base currency will decrease, while the value of another change will increase.
The profits is only about the differences of two currencies.
Now we focus on the differences of buying and selling in long or in short.
When we are in long the value of buying cross is shown by bid (money), while we are in short if we buy the couple of currencies according to the value indicated by ask (letter).
The value of ask is always greater than bid and the difference between ask and bid is the spread.
These words were traditionally used in the past, when some people bought giving money, and the other sold giving letter, a paper document.
Nowadays these terms are very diffused; the money represents what we can pay for buying a value or some shares, the letter is the demand of money from a seller.
According to the EUR/USD cross the spread is usually about 2-3 pips.
For the other cross less exchanged, the spread is usually higher and it can be also to20-30 pips.
In fact, when we make an operation of marketing (currency or shares) we are immediately in loss ratio about few peps, the pips lost in comparison with the value of the pair we have bought, it’s caused by the spread, which is the price we had to pay to broker when we wanted to made the order.