All the currencies are always quoted in pairs, thus for every transaction in the Forex market you are simultaneously purchasing one currency and selling another.
Forex trading is a popular form of investment and speculation that involves buying and selling currencies. In this market, traders aim to profit from fluctuations in the exchange rates of different currencies. To achieve this, they need to have a deep understanding of what is traded in the Forex market.
The Basics of Forex Trading
Forex trading is an abbreviation of "foreign exchange." It refers to the market where currency pairs are traded. The market is decentralized, meaning that it operates without a central exchange. Forex trading is done over the counter (OTC), meaning that trades are executed through a network of dealers, instead of a centralized exchange.
What is Traded in Forex?
The Forex market is a market for the trading of currencies. In this market, currency pairs are traded. The most commonly traded currency pairs are the US dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Swiss franc (CHF), and the Canadian dollar (CAD). These currencies are considered the "major" currencies and are the most widely traded in the Forex market.
In Forex trading, traders buy one currency and sell another at the same time. For example, if a trader believes that the value of the USD will increase against the euro, they would buy USD and sell EUR. This trade is known as a "long" position. If the trader believes that the value of the USD will decrease against the euro, they would sell USD and buy EUR. This trade is known as a "short" position.
When you exchange US dollars for Euros, there are two currencies involved. For every foreign exchange transaction, you must exchange one currency for another. This is why the forex market uses currency pairs, so you can see the cost of one currency relative to another.
For instance, as discussed EUR/USD is the most traded currency pair in the world. The EUR/USD price or exchange rate lets you know how many US dollars (USD) it takes to buy one euro (EUR).
Based on the illustration above, considering the exchange rate at the time is 1.1350, then 1 Euro would give 1.1350 US dollars in exchange.
Understanding Currency Pairs
Forex traders must have a deep understanding of currency pairs to succeed in the market. A currency pair is the quotation of two different currencies, one currency is sold while the other is bought. The first currency in the pair is known as the base currency, while the second currency is known as the quote currency.
For example, in the EUR/USD currency pair, the euro (EUR) is the base currency, and the US dollar (USD) is the quote currency. If the price of the EUR/USD pair is 1.1350, this means that 1 euro can be exchanged for 1.1350 US dollars. If a trader buys the EUR/USD pair, they are buying the euro and selling the US dollar. If a trader sells the EUR/USD pair, they are selling the euro and buying the US dollar.
In the next topic, we will explain more about currency pairs in detail.