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. 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.
  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

    How Are International Exchange Rates Set?

    International exchange rates show how much one unit of a currency can be exchanged for another currency.
  8. Trading

    What Happens in a Currency Crisis?

    A currency crisis comes from a decline in the value of a country’s currency.
Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
Trading Center