Forex Trading is weird…
You can’t just buy or sell a currency, you have to trade them in pairs against each other.
So, how do you make sense of this?
If you want to sell (or “short”) the USD, you have to match it up with another currency in order to make a transaction… You can’t just sell the USD.
You must ALWAYS trade two currencies at one time in a “pair”.
The Foreign Exchange Market works through currency pairs, so that’s the only way we can trade it.
And when you think about it, it only makes sense that way; it would be impossible to make a transaction any other way.
Think about it: If I were to go to the currency exchange at my local bank and buy some Euros with my United States Dollars, I’m still using a “Pair of Currencies.” I am buying Euros in exchange for my own currency. Or in other words, I am selling my own money to buy Euros. It works the exact same way in the Forex Market.
Now, the tricky thing about Forex can be understanding the order that the pairs are listed in..
For instance, there are a host of pairs that the USD is the second currency listed (for example: EUR/USD, GBP/USD, AUD/USD), but there are also many pairs that the USD is the first currency listed (for example: USD/CAD, USD/CHF, USD/JPY).
So how do we make sense of this?
Understanding the relationship is actually very simple once you get the hang of it.
Remember, you are ALWAYS buying one currency and selling another when you make a transaction or a trade in Forex.
Which action (buy or sell) to which currency (first or second) can be determined by understanding how the “pair” itself works.
First, a “pair” has 2 parts.: The currency listed first and the currency listed second.
The Currency listed first is Called the BASE CURRENCY–In the EUR/USD, the Euro is the BASE CURRENCY.
The Currency listed second is Called the QUOTE CURRENCY–In the EUR/USD, the U.S. Dollar is the QUOTE CURRENCY.
Now, we are always Buying (going “long”) or Selling (going “short”) a currency pair.
You either sell or buy the pair as a whole.
When taking one of these actions, remember this:
The Action you take, whether buying or selling, is done Directly to the Base Currency and Inversely to the Quote Currency.
In other words, if you buy a pair, you are buying the Base (first currency listed) and selling the Quote (second currency listed), so Buying the EUR/USD means that you are buying Euros and Selling U.S. Dollars–this is the same thing as going to the Exchange and “selling” U.S. Dollars for Euros because you are buying Euros against U.S. Dollars.
Here is a Graphic to help explain it:
Understanding which currency you are buying and which you are selling is as simple as understanding the fundamentals of how a “Pair” works.
Remember these few things, and you should have no problem determining how to use Currency Pairs:
1. A pair is listed using two different currencies in a given order
2. The first currency listed is the “Base” Currency
3. The second currency listed is the “Quote” Currency
4. Whatever action you take on the pair Direcly affects the Base Currency and Inversely affects the Quote currency
5. You are always buying one currency AND selling one currency when you make a trade
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