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How it Works


The market which allows traders to trade international currencies across the globe is known as the foreign exchange market or forex market. Since we always deal with two currencies in a forex transaction, the quote is expressed in a pair. For example, the pair EUR/USD represents an exchange of Euro into US dollars. Currency value is always relative since the value of one currency can only be determined in another currency. Value of currency is said to be strong if it is trading at high exchange rate against other currencies and the same is said to be weak if it is trading at a low exchange rate.

The currency value appreciates or depreciates against other currencies due to demand and supply gaps. In a long-term perspective the demand and supply depend on the health of the economy and therefore the fundamental analysis comes into the picture. In the short-term, the prices movement depends on short-term speculative trading. So the technical analysis comes into the picture. When we sell a currency, it means that we sell the Base Currency by buying the Quote Currency. In EUR/USD, EUR is the base currency and USD is the Quote currency and selling EUR/USD means that we Sell the Euro to buy USD. The currency on the left is called the Base Currency and the one on the other side is called the Quote Currency. We can SELL the currency pair if we think that the base currency will DEPRECIATE compared to the quote currency. You can buy a currency pair when you think that the value of the base currency will go up. When the price appreciates, you sell the currency pair to earn profits.

On the other hand, if you think that the value of the base currency will go down, then you sell the pair first and when the price goes down, then you buy it back to earn your profits. When you have sold it without having it, you have just taken it on loan or borrowing from your forex broker and have sold that. And when the price goes down, you buy that currency pair to close your trading position. You ‘take a position’ in the market when you buy or sell a currency pair. If you buy a currency pair, you are said to be ‘long’ position. On the other hand, if you sell a pair, you are said to be ‘short’ position. Short-selling is when you first sell the currency pair without having any bought position. The bottom line is that you can make a profit on both sides i.e. by going long or by going short.

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