Forex Trading: Two Sides to Every Trade
Every market has two sides, and forex trading is no exception.
The way prices are quoted in the Forex market is one of its distinguishing features.
The only way to quote a currency is to compare it to another currency, because currencies are the foundation of the financial Trading system.
This results in a relative gauge that may appear baffling at first, but which can become more balanced as time goes on with this two-sided approach.
Forex trading pairs give the trader a little more flexibility by allowing them to trade the currencies they choose.
Let’s take the USD as an example. Let’s imagine a trader believes the American economy is on the rise and wants to BUY the currency.
However, imagine that this Trader is pessimistic on the UK economy.
In this case, the investor does not have to buy the USD against the EUR (a short EUR/USD trade); instead, he can buy the USD against the British Pound (a Short GBP/USD trade).
Forex Trading: Base v/s Counter Currencies
The convention of a Forex quote is important: the first currency included in the quote is known as the pair’s ‘base’ currency. The base Currency is either bought or sold against the second currency.
Forex Trading: The Forex Market Explained
The foreign exchange market is driven by supply and demand, just like other markets.
To provide a simple example, if there is a high demand for the US Dollar among European residents holding Euros, they will convert their Euros to Dollars.
The US Dollar will appreciate in value, while the Euro will depreciate.
Remember that this transaction solely affects the EUR/USD exchange rate.