Comments on: How is currency Traded? http://www.myylt.com/2008/03/07/how-is-currency-traded/ Discussion of Forex Trading and Currency Trading Sat, 19 May 2012 10:58:41 +0000 http://wordpress.org/?v=2.3.3 By: Indiana Frenchman http://www.myylt.com/2008/03/07/how-is-currency-traded/#comment-3 Indiana Frenchman Tue, 30 Nov 1999 00:00:00 +0000 http://www.myylt.com/2008/03/07/how-is-currency-traded/#comment-3 What is Foreign Exchange? Foreign Exchange (or Forex or FX) is the buying or selling of one currency against another currency at current exchange rates. Exchange rates, influenced by real world events, change constantly. Buying and Selling In forex trading, you either buy (go long) or sell (go short) the first currency in a currency pair. All trades result in the buying of one currency and the selling of another, simultaneously. 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 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. When you request to buy or sell a currency pair, you are "opening a trade" or "taking a position" based on the exchange rate at the time. Right after you open a trade, 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 What is Foreign Exchange?
Foreign Exchange (or Forex or FX) is the buying or selling of one currency against another currency at current exchange rates. Exchange rates, influenced by real world events, change constantly.

Buying and Selling
In forex trading, you either buy (go long) or sell (go short) the first currency in a currency pair. All trades result in the buying of one currency and the selling of another, simultaneously.

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 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.
When you request to buy or sell a currency pair, you are "opening a trade" or "taking a position" based on the exchange rate at the time. Right after you open a trade, 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

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