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

Currencies are traded, and priced, in pairs. For example, you may have seen a currency quote for a EUR/USD pair of 1.1256. 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 1.1256 U.S. dollars. How an investor makes money in forex is either by an appreciation in the value of the quoted currency, or by a decrease in value of the base currency.

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 $1.1256 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 $1.1266. On a lot of $100,000 the investor would gain US$100 ($112,660 - $112,560) if he or she sold the euros at this exchange rate. Conversely, if the EUR/USD exchange rate fell by 10 pips to $1.1246, then the investor would lose US$100 ($112,460 - $112,560).

Beginners who want to learn more about active trading in the forex should read A Primer on the Forex Market, Money Management Matters and Getting Started In Forex.

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RELATED TERMS
  1. Currency Pair

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  2. Currency Pairs

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  4. Base Currency

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  5. Reciprocal Currency

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  6. Currency Appreciation

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