The Forex market is a place where investors can make money trading currencies. A forex market functions on similar lines to those of the stock market. For those who are already experienced in stock trading, Forex trading would be a very similar experience.
By understanding how the Forex market functions and some of the basic tricks of the Forex trade, it is possible to easily make money trading currencies. Buying and selling of currencies in pairs is the prime trade that happens in the Forex market. One currency is exchanged for another. When the value of the bought currency goes up in comparison to the one sold, a profit is made. Some important terminology used in the Forex market includes exchange rate, Forex quote and Long/ Short.
To make money trading currencies, the first step is to get accustomed to the jargon used in the Forex trade. Exchange Rate is nothing but the ratio of the value one currency vis-à-vis value of another currency. The two currencies are referred to as a currency pair.
For instance, a USD/GBP exchange rate can be read as how many US dollars will be needed to purchase one Great Britain Pound or how many Great Britain Pounds are required to purchase one US dollar. To make money trading currencies, understanding this with an example would be apt. GBP/USD = 1.25 is a typical Forex quote. In this, the first currency is referred to as the Base currency. The second currency is known as the Quote currency or Counter currency.
When an investor buys currency, the exchange rate gives how many units of the quote currency is needed to buy one unit of the base currency. In the sample above, the investor needs 1.25 US dollars in order to buy one single Great Britain Pound. The exchange rate is interpreted slightly differently while selling – that is how many units of quote currency can be acquired by selling a single unit of base currency. In the above example, the Forex trader can get 1.25 dollars by selling one British pound.
The base currency is the primary factor that decides whether an investor buys or sells. To make money trading currencies, one has to decide to buy or sell. For this the long/ short position has to be analysed. To buy, the base currency value has to rise (long position) and to sell the base currency value has to fall (short position).
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