Forex Fundamentals – A Beginner’s Guide
In this lesson, we’ll look at the fundamentals of FX trading.
Forex trading involves buying one currency while simultaneously selling another with the expectation
that the currency you buy will increase in value, or the currency you sell will decrease in value.
Each currency pair consists of two currencies. The base currency appears on the left side and the quote
currency is on the right side. There are two main positions a trader can take:
Going long – this involves buying the base currency and selling the quote currency.
Going short – this involves selling the base currency and buying the quote currency.
For example, when you buy EUR/USD, you are buying euros and selling dollars. Conversely, selling
EUR/USD means you are selling euros and buying dollars.
Let’s look at an example. You decide to buy 1,000 euros, with the exchange rate of EUR/USD currently
at 1.0900. To buy 1,000 euros, you would need 1,090 US dollars based on the current exchange rate.
If the EUR appreciates or the USD depreciates, and the exchange rate goes up from 1.0900 to 1.1100,
selling your euros back into US dollars would now give you 1,110 US dollars giving you a small gain of
20 US dollars ($1,110-$1,090=$20).
On the other hand, if you decide to sell EUR/USD instead of buying EUR/USD (i.e. buy dollars and sell
euros), EUR/USD would have to depreciate for the trade to be profitable. So, in order to realise profits,
the opposite action would need to be taken (i.e. buy back EUR/USD).
Remember that your goal is to buy the currency that you expect will go up in value and sell the
currency you expect to decline in value.
In our next lesson, we’ll be exploring currency pairs.