Investors can trade almost any currency in the world, and can do it with the help of foreign exchange (Forex), if they have enough financial capital to get started. In order to earn money in Forex, you must understand that you assume speculative risk you are betting that the value of one currency will rise against another.
Examples of currency trading
It’s first important to note that currencies are traded, and the prices in pairs. For example, you can see the quotes of the Euro/1.1256 USD. In this example Euro is the base currency and USD is the quote currency.
In all cases, Currency quotes, the base Currency is worth one unit, and the quoted currency is the amount of currency that one unit of the base currency can buy. Based on our previous example, all this means that one Euro can buy $ 1.1256$. As an investor makes money in Forex either increase the value of the quoted currency or a decrease in the value of the base currency.
Another way to look at currency trading is to think about the position an investor is taking on each currency pair. The base currency can be regarded as a short position because You are “selling” the base Currency to purchase the quoted currency. In turn, the quoted currency can be viewed as a long position on a currency pair.
In our example above, we see that one Euro can buy $1.1256, and Vice versa. To buy euros, the investor must first go short on the U.S. dollar in order to adopt the Euro. To capitalize on this investment, the investor will be able to sell the euros when their value appreciates relative to the U.S. dollar.
For example, suppose that the value of the Euro will rise to $1.1266. For a lot of 100 000$, the investor will receive 100 $ (112,660 $ – $112,560) if they sold the euros at the fixed rate. Conversely, if the EUR/USD fell by 10 pips to $1.1246, then the investor will lose $100 (112,460 $- $112,560).
Beginners who want to learn more about active trading operations on Forex, should read “a Primer on the market Forex,” “Forex: money Management Matters” and “getting started in Forex”.