Foreign Exchange (or Forex or FX) is the buying or selling of one currency against another currency. All trades result in the buying of one currency and the selling of another, simultaneously.

In forex trading, you place an order to buy (go long) or sell (go short) the first currency in a currency pair at current exchange rates.

Buying

Buying a currency pair implies buying (longing) the first (base) currency and selling (shorting) an equivalent amount of the second (quote) currency to pay for the base currency. For example, buying EUR/USD means that you are buying Euros (EUR) using US Dollars (USD).

It is not necessary for the trader to own the quoted currency prior to selling, as it is sold short. A speculator buys a currency pair if she believes the exchange rate for the base currency will go up relative to that for the quote currency (that is, the value of the pair will go up).

Selling

Selling the currency pair implies selling (shorting) the first (base) currency and buying (longing) an equivalent amount of the second (quote) currency to buy the base currency. For example, selling EUR/USD means that you are buying US Dollars (USD) using Euros (EUR).

A speculator sells a currency pair if she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.

Placing an Order

When you request to buy or sell a currency pair, you place an order (also called "opening a trade") so that you "take a position") based on the exchange rate at the time. Right after you place an order, the value of the position will be close to zero, because the value of the base currency is more or less equal to the value of the equivalent amount of the quote currency. (In fact, the value will be slightly negative, because of the spread involved.)

As time goes on and exchange rates change, the value of the position will evolve to be profitable (or not). When you eventually decide to take a profit or stop a loss on the position, you "close" the trade. When you close the trade, Profit/Loss is calculated from the difference between the exchange rate at the time you opened the trade to the time you closed it.

Examples

Suppose EUR/USD = 1.5000, and you sell 10,000:

• Your base currency position is 10,000 EUR
• Your quote or counter currency position is 10,000*1.5000=15,000.00 USD

Let's say, hypothetically, that there is political turmoil in Japan. If you believe that the Yen will depreciate as a result of this turmoil, you have the following outlook:

• It is a good time to be long (buy) USD
• It is a good time to be short (sell) JPY

If you think the USD/CAD will move up:

• You are bullish on the USD
• You believe the USD/CAD is undervalued
• You want to be long USD/CAD