For those with experience in trading the stocks or futures, forex trading will be easy to understand. It is basically the buying or selling of currencies. The main goal in forex trading is to exchange or buy one currency for another currency, with the expectation that the price of the currency you bought or exchanged will have an increased value compared to the currency you sold or exchanged it with. That is how you make money from forex trading.
To illustrate, let us say for example that you bought 100,000 Euros at the EUR/USD exchange rate of 1.20. Then after a week, you exchange back those 100,000 Euros to dollar, this time at an increased rate of 1.25. EUR100,000 multiplied by 1.20 is US$120,000 and EUR100,000 multiplied by 1.25 is US$125,000. The difference between the two is your profit. If millions instead of hundreds of thousands are involved, then bigger profits are earned. Both rates 1.20 and 1.25 are the ratios of one currency over the other. Using the same example, it simply means that 1 euro can purchase 1.2 or 1.25 US dollars. This is just an example and it does not mean that these are the actual and present exchange rates of the two currencies.
You may ask why currencies are always quoted in pairs. This is because in every forex transaction, you buy one currency the very same time that you are selling another. Let us use another illustration, considering the sample “forex quote” we used above, EUR/USD=1.2500. The euro in this equation is called the “base currency.” The US dollar on the other hand is the “counter or quote currency.” If you will buy a currency given this example, the exchange rate dictates how much you need to pay in units of the quote currency (which is the dollar in this example) to purchase one unit of the base currency (the euro in this case). Therefore, you have to pay 1.25 U.S. dollars to purchase 1 euro. If you will be selling, the same principle applies. Only this time, again using the same example, the exchange rate dictates how many units of the quote currency (dollar) you will get if you will sell one unit of the base currency (euro). This means that you will have 1.25 U.S. dollars for every euro you sell.
The basis for buying and selling in a forex trading market is the “base currency.” If you say you will buy EUR/USD, it means you are buying the base currency (euro) and at the same time selling the quote currency (dollar). The base currency is also the basis of the trader’s movement in forex. If he thinks the base currency in a pair will go up, then it is a wise move to buy the pair. If, on the other hand, he thinks that the base currency will go down, then it is wise to sell the pair.
In forex trading lingo, two of the most important words to remember are “long” and “short.” “Long” and “buy,” as well as “short” and “sell” are respective synonyms. When you buy, it is already in your mind and in your expectation that the base currency will rise in value so that you could, in turn, sell it at a higher price. This is what the traders call taking a “long position” or “going long.” If selling, you expect the base currency to depreciate so that you could buy it back at a lower price. This now is what is called by traders as a “short position” or going short.
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