Forex Currency Trading Basics – How A Forex Currency Trade Works

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The foreign exchange market is one of the largest

in the world if not the largest. 9 billion, more than 3 times larger than the

stock/equities market and more than 5 times bigger than futures, give Forex

traders nearly unlimited liquidity and flexibility. It has been estimated that

approximately $2 trillion USD of currency exchanges hands each and every day.

The world’s currencies are on a floating exchange

rate and are always traded in pairs, for example EUR/USD or USD/JPY or USD/INR.

The Forex currency pair is a single unit, an instrument that is bought or sold

in the Forex market. Each currency pair is expressed in units of the counter

currency needed to get one unit of the base currency

The first currency is called the base currency and

the second listed currency is called the quote or counter currency. The base

currency is the basis for the buy or sell transaction. For example if you place

a BUY order in the EURO/USD pair you are effectively buying EURO dollars and

selling US Dollars.

Example

EURO/USD

Interest rates are due to fall in the US and

therefore you believe the Euro will appreciate due to the European Union having

higher interest rates. Therefore in order to take advantage of this and make a

bet against the US dollar you would BUY EURO/USD. This buy order effectively is

buying EURO dollars and selling US Dollars.

Alternatively if you think the EURO dollars will

fall due to economic problems such as high inflation and increasing unemployment

and want to make a trade that the EURO dollars will fall against the US dollar

you would need to SELL the EURO/USD currency pair. This sell order also referred to as

GOING SHORT effectively is selling EURO dollars and buying US dollars.

Therefore in summary:

BUY EURO/USD (Long the EURO) – Buy EURO Selling USD

Assumption EURO to appreciate against the USD

SELL EURO/USD (Short the EURO) – Sell EURO Buy USD

Assumption USD to appreciate against the EURO.


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