Currencies are traded in dollar amounts called lots. One lot is equal to $1,000, which controls $100,000 in currency.
This is what is known as the “margin”. You can control $100,000 worth of currency for only 1,000 dollars. Using margin in this way creates a “leveraged” position.
Currencies are always traded in pairs in the FOREX. The pairs have a unique notation that expresses what currencies are being traded. The symbol for a currency pair will always be in the form ABC/DEF. ABC/DEF is not a real currency pair, it is an example of a symbol for a currency pair. In this example ABC is the symbol for one countries currency and DEF is the symbol for another countries currency.
Here are some of the common symbols used in the Forex:
USD – The US Dollar
EUR – The currency of the European Union “EURO”
GBP – The British Pound
JPN – The Japanese Yen
CHF – The Swiss Franc
AUD – The Australian Dollar
CAD – The Canadian Dollar
There are symbols for other currencies as well, but these are the most commonly traded ones.
A currency can never be traded by itself. You can’t trade a EUR by itself because you would always need to use another currency to buy it. Hence currencies are always quoted in pairs (the price of one in terms of another).
Some of the common PAIRS are:
EUR/USD Euro / US Dollar
“Euro”
USD/JPY US Dollar / Japanese Yen
“Dollar Yen”
GBP/USD British Pound / US Dollar
“Cable”
USD/CAD US Dollar / Canadian Dollar
“Dollar Canada”
AUD/USD Australian Dollar/US Dollar
“Aussie Dollar”
USD/CHF US Dollar / Swiss Franc
“Swissy”
EUR/JPY Euro / Japanese Yen
“Euro Yen”
The listed currency pairs above look like a fraction, which is because that’s essentially what they are. The numerator (top of the fraction or “left” of the ” / “) is called the base currency. The denominator (bottom of the fraction or “right” of the ” / “) is called the counter currency.
When you place an order to buy the EUR/USD, for instance, you are actually buying the EUR and selling the USD. If you were to sell the pair, you would be selling the EUR and buying the USD. So if you buy or sell a currency PAIR, you are buying/selling the base currency. You are always doing the opposite of what you did with to base currency with the counter currency.
If this seems confusing then you’re in luck. You can always get by with just thinking of the entire pair as one item. Then you are just buying or selling that one item. Thinking like this will still enable you to place trades. You only
need to be aware of the base/counter concept for Fundamental Analysis issues.
So why is it important to know about the base/counter currency? The base/counter currency concept illustrates
what is actually taking place in a Forex transaction.
Some of you reading this will already know that short-selling was restricted in the stock market *(Short-selling is where you sell a stock/currency/option/commodity first and then try to buy it back at a lower price later). But in the forex you are always buying one currency (base) and selling another (counter).
If you sell the pair you are simply flipping which one you buy and which one you sell. The transaction is essentially the same. This allows you to short-sell with no restrictions.
You want to be able to short-sell with no restrictions so you can make money when the market drops as well as when it rises. The problem with traditional stock market trading is that the market has to go up for you to make money. With forex trading you can make money whichever direction the market moves!