You know the advantages of trading forex, and you are excited to start trading. Now you need to learn what this market is all about. How does it work? What makes currency pairs move up and down? Most importantly, how can you make money trading forex?
Every successful forex investor begins with a solid foundation of knowledge upon which to build. Let’s start with currency pairs—the building blocks of the forex market—and how you will be using them in your trading.
In this first section, we will explain the following to get you ready to place your first trade:
- What a currency pair is.
- How you can trade a currency pair.
- What happens when you trade a currency pair.
Currencies come in pairs
Everything is relative in the forex market. The euro, by itself, is neither strong nor weak. The same holds true for the U.S. dollar. By itself, it is neither strong nor weak. Only when you compare two currencies together can you determine how strong or weak each currency is in relation to the other currency.
For example, the euro could be getting stronger compared to the U.S. dollar. However, the euro could also be getting weaker compared to the British pound at the same time.
Currencies always trade in pairs. You never simply buy the euro or sell the U.S. dollar. You trade them as a pair. If you believe the euro is gaining strength compared to the U.S. dollar, you buy euros and sell U.S. dollars at the same time. If you believe the U.S. dollar is gaining strength compared to the euro, you buy U.S. dollars and sell euros at the same time. You always buy the stronger currency and sell the weaker currency.