What is Forex Trading?

You will need to know these forex glossary terms for this set:

A Pair of currencies: a representation of two currencies that are being compared against each other, and essentially will be traded against each other

Base currency: the value on the left of a pair of currencies

Counter currency or quote currency: the value on the right of a pair of currencies

The aim of the game is to buy or sell a large amount of one currency against the value of another currency. The trader’s hopes are that the price of the bought currency will gain value, in comparison with another currency, so that he can make a profit on the difference, when he sells. These two currencies are represented as a pair of currencies. Currencies will always be represented in pairs because the exchange rate requires two currency values in order for an exchange rate to occur.

For example, you will see a currency pair represented as “EUR/USD.” This is the exchange rate of Euros to US Dollars. The “base currency” (Euros) is on the left; the “counter currency” or “quote currency” (US Dollars) is on the right. The exchange rate, for buyers, is how much of the quote currency you will need to purchase one unit of the base currency. The exchange rate, for sellers, is how much of the quote currency you will receive for selling one unit of the base currency. You buy the base currency and sell the quote currency if you think the base currency is going to appreciate against the quote currency. If you think the value of the base currency will go down in relation to the quote currency, you sell. These two actions are the basis for Forex trading and they are referred to as “going long” or “going short.”

The Long and Short of Going Long or Going Short