Forex Trading Basics
Trading currencies in the Forex market & basic concepts of buying and selling.
Firstly, let us take the idea of buying shares. Just say you bought something (it could be anything in the world, a pet, a house, an item of jewellery or a stock) and it goes up in value. If you sell it at that point in time, you would have made a profit. The profit being the difference between what you originally paid for it minus the amount you paid for it at an earlier time.
This single statement sums up Forex trading basics.
Currency trading works exactly the same way.
For example, say you want to buy the USD/EUR currency pair. If the USD goes up in value relative to the EUR and then you sell it, you will have made a profit. A trader in this example would be buying the USD and selling the EUR at the same time.
If the USDEUR pair was bought at 1.0715 and the pair moved up to 1.0805 at the time that the trade was closed/exited, the profit on the trade would have been 90 pips.
Had the pair moved down to 1.0650 before the trade was closed, the loss on the trade would have been 65 pips.
Also, it makes no difference which currency pair you are trading. If the price of the currency you are buying goes up from the time you bought it, you will have made a profit.
More forex trading basics examples
Another example using the GBP. In this case we still want to buy the GBP but let’s do this with the EURGBP currency pair. In this instance we would sell the pair. We would be selling the EUR and buying the GBP simultaneously. Should the GBP go up relative to the EUR we would profit as we bought the GBP.
Remember, we are always buying or selling the currency on the left side of the pair. If we buy the currency on the left side, which is called the base currency, we are selling the one on the right side which is called the cross or counter currency. The opposite would be true if we were selling the currency on the left side.
Now let's take a look at how a trader can make a profit by selling a currency pair. This concept is a little trickier to understand than buying. It is based on the idea of selling something that you borrowed as opposed to selling something that you own.
In the case of currency trading, when taking a sell position you would borrow the currency in the pair that you were selling from your broker (this all takes place seamlessly within the trading station when the trade is executed) and if the price went down, you would then sell it back to the broker at the lower price. The difference between the price at which you borrowed it (the higher price) and the price at which you sold it back to them (the lower price) would be your profit.
For example, let’s say a trader believes that the USD will go down relative to the JPY. In this case the trader would want to sell the USDJPY pair. They would be selling the USD and buying the JPY at the same time. The trader would be borrowing the USD from their broker when they execute the trade. If the trade moved in their favor the JPY would increase in value and the USD would decrease. At the point where they closed out the trade, their profits from the JPY increasing in value would be used to pay back the broker for the borrowed USD at the now lower price. After paying back the broker, the remainder would be their profit on the trade.
For example, let’s say the trader shorted the USDJPY pair at 76.28. If the pair did in fact move down and the trader closed/exited the position at 75.61, the profit on the trade would be 67 pips.
On the other hand, if the pair was shorted at 76.28 and the pair did not move down but rather it moved up to 76.55 when the position was closed, there would be a loss on the trade of 27 pips.
Simply, this how you can make a profit from selling something that you do not own.
In wrapping up, if you buy a currency pair and it moves up, that trade would show a profit. If you sell a currency pair and it moves down, that trade would show a profit.
Well thats it for forex trading basics transactions, your ready to move to the next step 🙂