Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in the forex if they have enough financial capital to get started and are astute enough to make money at it. How someone makes money in the forex is a speculative process: you are betting that the value of one currency will increase relative to another.

Currencies are traded, and priced, in pairs within the forex. For example, you may have seen a currency quote for a EUR/USD pair of 1.2131. In this example, the base currency is the euro and the U.S. dollar is the quote currency. In all currency quote cases, the base currency is worth one unit, and the quoted currency is the amount of currency that one unit of the base currency can buy. So, in this example, one euro can buy 1.2131 U.S. dollars. How an investor makes money in forex is by either an appreciation in the value of the quoted currency, or by a decrease in value of the base currency. (For an overview of foreign exchange, read A Primer On The Forex Market.)

Another way to look at currency trading is to think about the position an investor is taking on each currency in the pair. The base currency can be thought of as a short position because you are "selling" the base currency to purchase the quoted currency, which can be seen as the long position on the currency pair. In our example above, we see that one euro can purchase $1.2131 and vice versa. To purchase the euros, the investor must first go short on the U.S. dollar in order to go long on the euro. To make money on this investment, the investor will have to sell back the euros when their value appreciates relative to the U.S. dollar. For example, assume the value of the euro appreciates to $1.2141 - on a lot of $100,000 the investor would gain US$100 ($121,410 - $121,310) if he or she sold the euros at this exchange rate. Conversely, if the EUR/USD exchange rate fell by 10 pips to $1.2121, then the investor would lose US$100 ($121,210 - $121,310).

To learn more about active trading in the forex, read Money Management Matters or Getting Started In Forex.

  1. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  2. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  3. How do I close a long position in forex?

    Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>
  4. Where did the term 'pip' in currency exchange come from?

    The term pip is an acronym for percentage in point or price interest point. It measures a unit of change within a pair of ... Read Full Answer >>
  5. How do changes in national interest rates affect a currency's value and exchange ...

    All other factors being equal, higher interest rates in a country increase the value of that country's currency relative ... Read Full Answer >>
  6. What is the difference between pips, points, and ticks?

    Point, tick and pip are terms used to describe price changes in the stock market and other markets. While traders and analysts ... Read Full Answer >>
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