Next video:
Loading the player...

Making money in the foreign exchange market 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. Take a quote for a euro-to-U.S. dollar pair of 1.2131. The base currency is the euro, and it’s worth one unit. The U.S. dollar is the quote currency, which is the amount that one unit of the base currency can buy.

In this example, one euro can buy 1.2131 U.S. dollars. Investors make money through the appreciation of the quoted currency, or a decrease in the base currency.

Another way to look at it is to think of the base currency as a short position. You are selling the base currency, or the euro, to buy the quoted currency, or the long position. One euro can buy $1.2131 U.S. dollars. To make money, the investor must sell the euro when its value appreciates relative to the U.S. dollar.

Assume the euro appreciates to 1.2141 U.S. dollars. On a lot of $100,000, the investor gains $100. That’s an increase to $121,410 from $121,310.

  1. No results found.
Related Articles
  1. Trading

    What is an Indirect Quote?

    An indirect quote expresses the amount of foreign currency required to buy or sell one unit of the domestic currency in the foreign exchange markets.
  2. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  3. Trading

    How to Calculate an Exchange Rate

    Struggling to get a grasp on exchange rates? Here's what you need to know.
  4. Investing

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  5. Trading

    What Makes the EUR/USD A Risky Trade Now?

    What are the current risks of trading the EUR/USD pair? The Fed may raise interest rates this summer and the ECB has begun a quanitative easing program.
  6. Investing

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  7. Trading

    4 Of The Most Popular Traded Currencies

    Every day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
  8. Trading

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
Hot Definitions
  1. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  2. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  3. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  4. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  5. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  6. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
Trading Center