Forex Currency Trading Basics  – How A Forex Currency Trade Works?

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 AUD/USD. 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 believe the Euro will appreciate due to the European Union having higher interest rates. Therefore in order to take advantage of this and take 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 take a trade that the EURO dollars will fall against the US dollar you would 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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