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In the Forex market you buy and sell currencies. It is very easy to trade in the foreign exchange market. The rules and fundamentals are the same as those of the Stock market. In Forex trading, you exchange one currency for another with the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold. Investors can trade almost any currency in the world. Investors may trade as individuals, countries, and companies.
What is exchange rate
An exchange rate is the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate shows how many U.S. dollars you can buy against a Swiss franc, or vice versa.
The currencies in the Forex market are always quoted in pairs, such as GBP/USD or USD/JPY. This is because in every foreign exchange transaction you are simultaneously buying one currency and selling another.
Below is an example of a foreign exchange rate displaying the British pound versus the U.S. Dollar:
GBP/USD = 1.7500
The exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example given above, you have to pay 1.7500 U.S. dollar to buy 1 British pound. On the other hand, when you are selling, the exchange rate tells you how many units of the U.S Dollar you get for selling one unit of the British pound. In the example given above, you will receive 1.7500 U.S. dollars when you sell 1 British pound. The currency listed first to the left of the slash is called the base currency, whereas the second one on the right is called the counter or quote currency (in this example, the U.S. dollar). The British pound is the base currency while the U.S Dollar is the counter or quote currency in this example.
You will buy the pair only if you believe that the base currency will appreciate in comparison to the quote currency. Similarly, you will sell the pair if you think the base currency will depreciate in comparison to the quote currency.
Going Long and Going Short
Going Long: If you want to buy the base currency and sell the quote currency, you will want the base currency to rise in value and then you would sell it back at a higher price. In trading terminology, this is called going long or taking a long position.
Going Short
If you want to sell the base currency and buy the quote currency, you will want the base currency to fall in value and then you would buy it back at a lower price. In trading terminology, this is called going short or taking a short position.
The base currency can be referred to as a short position This is called going short because you are "selling" the base currency to purchase the quoted currency, which can be seen as the long position on the currency pair.