How to Trade Forex – The Basics

In our previous video we discussed the dual nature of money and FX pairs

Trading forex refers to buying a currency (and at the same time selling another) with the idea that the currency I bought will rise in value, or the currency I sold will go down. 

Note that each currency pair has two currencies. The one noted on the left-hand side is the base currency and the one noted on the right-hand side is the variable currency or the quote currency. Hence there are two positions a trader may open to start trading. The trader is either going to buy the pair, what the market calls ‘go long’ which involves buying (i.e. taking) the base currency and at the same time selling (i.e. giving) the variable currency. Or the trader is going to go short, which is selling (i.e. giving) the base currency and buying (i.e. taking) the variable currency.

For example, when you buy EUR/USD that would mean that you buy (i.e. take) euros and sell (i.e. give) dollars.

On the other hand, when you sell EUR/USD that would mean selling (i.e. giving) euros and buying (i.e. taking) dollars.

Let’s assume that you buy 1000 Euros, with the exchange rate of EUR/USD currently being at 1.0500. To buy 1000 Euros, you would require 1050 US Dollars, given the current exchange rate. Let’s assume that you make the transaction and after a week the EUR appreciates or the USD depreciates and the exchange rate goes up from 1.0500 to 1.0800. If you change your Euros back into US Dollars that would mean that for the 1000 Euros you are now selling you would get 1080 US Dollars giving you a small profit of 30 US Dollars.

If instead of buying EUR/USD you sold EUR/USD (i.e. bought dollars and sold euros), for the trade to be profitable EUR/USD would have to go down and to realize profits the opposite action would have to be performed (i.e. buy EUR/USD back).

Never forget that your aim is to buy the currency that you expect will appreciate in value and sell the currency you expect to depreciate. 

In the next video we’ll be discussing what currency pair categories are out there