Forex Trading just means buying or selling currency pairs with the intention of making a profit through the forex market. Most people know the foreign exchange as a market where currencies are exchanged.
This exchange can be profitable if done in big volumes. It is pretty comparable to the stock market. Always buy low, always sell high. A profit is gained by price movement in or against your favor. Now let us look at ways currencies are traded.
All currencies on the forex market are traded in the form of a currency pair. For illustration, the Euro/Usd pair which is just the Euro Dollar against the American Dollar. Or the Gbp/Jpy pair which is the British Pound versus the Japanese Yen.
Why is this done? In a pair, the value of a currency can be known. This comparison between two currencies allows us to determine if a currency has risen or dropped in value. They can be paired not just with other currencies but with commodities as well such as silver and gold. Let us understand currency pairs a bit more. The In any pair, the currency seperated to the left is called the base currency while the one on the right is known as the quote currency. In the case of the Eur/Usd, the base currency would be Eur while the quote currency would be Usd. What takes place when a trader buys a pair is the buying of the base currency against the selling of the quote currency. The opposite happens should you sell the pair, you sell the base currency and buy the quote currency.
When a trader buys the Eur/Usd, the trader is buying the Euro and selling the American dollar. The opposite happens when you sell the Eur/Usd, buy the Us dollar and sell the Euro. In forex trading, this happens with all pairs. Let us look at how we profit from forex trading with pairs. If the price of a currency pair start to rise, what is happening is the rise in value of the base currency over the quote currency. If price drops, the base currency is losing value against the quote currency. Any profits are losses in forex trading are directly linked to the fluctuating value of the two currencies.
Imagine you put a buy order on the Gbp/Jpy when it touched 150.00. This means you are backing the British Pound (Base currency) to rise in value over the Japanese Yen (Quote currency). Let us further assume that the price rises to 150.50. This would mean that you are making a 50 pip profit minus whatever spreads the broker charged you for the trade. Pips are like points in the stock market, they are a way to measure performance. It stands for price index position.
Assume the gbp/jpy went in the opposite direction instead. Lets say it dropped to 149.50. You would now be making an unrealized loss of 50 pips plus the spread. I mention unrealized because your account will not reflect the loss or profit until you close the trade. This is how traders make or lose money in forex trading.
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