Forex trading involves buying a currency and simultaneously selling another with the expectation that the currency you bought will increase in value.
It’s essential to note that each currency pair comprises two currencies. The one listed on the left-hand side is the base currency, and the one on the right-hand side is the variable currency, also known as the quote currency. Consequently, traders have two options when they open a position to start trading. They can either buy the pair or “go long”, which involves buying the base currency while simultaneously selling the variable currency. Alternatively, they can “go short”, which involves selling the base currency and buying the variable currency.
For example, when you buy EUR/USD it signifies that you are buying euros while selling dollars.
On the other hand, selling EUR/USD means selling euros and buying dollars.
Let’s consider a situation where 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, based on the current exchange rate. Now, let’s say after a week the EUR appreciates or the USD depreciates, causing the exchange rate to rise from 1.0500 to 1.0800. If you change your Euros back into US Dollars, you would receive 1080 Dollars for the 1000 Euros sold, giving you a small profit of 30 US Dollars. Conversely, if you had sold EUR/USD instead of buying it, your trade would be profitable only if EUR/USD decreased in value.
Always bear in mind that your objective is to buy the currency that you expect will increase in value and sell the currency you expect to decrease in value.
