Currencies used around the world change in value several times during the day. This movement in values is at the core of foreign exchange trading or simply forex trading. Just like in stock trading, forex traders earn by buying and selling currencies. Unlike stocks, however, forex trading has very high liquidity due to huge trading volumes so that traders can buy and sell currencies anytime they want. The decentralized nature of the foreign exchange market also makes it more accessible.
Forex trading can even be carried out online requiring only an Internet connection and a web-based client software application.
Since buying and selling currencies can be performed anytime, forex trading conveniently works by currency pairs. In this scheme, traders sell out the counterpart currency every time a base currency is bought or vice versa. The United States dollar, being the currency that belongs to the largest economy in the world, is included on one side of the deal in the set of major currency pairs.
For instance, trading the ISO currency pair denoted by EUR/USD implies that the trader buys the euro currency and sells the dollar currency. When selling this currency pair, it would imply that the trader sells the euro and simultaneously buys the dollar.
Investors and traders earn in forex trading by strategically buying those currencies that are at the moment in their lower values with the expectation that these currencies will likely bounce up in the near future. Equivalently, selling out currencies highly valued than normal is the subsequent strategy to earn from the currency price movement. This simultaneous buy-and-sell of currencies is the basic mechanism of forex trading.
Two important terminologies are derived from the basic mechanism just described; these are going long and getting short. A long refers to the market position where the trader bought a security, the currency pair. In this position, traders would want the prices to move higher and then sell the currency when the opportunity comes.
A short, on the other hand, is the contrasting market position in which the trader sells the security, that is, the currency pair, which he never owned. Consequently, traders would want the prices to move lower and buy it back to gain profit.
In addition to this basic mechanism, forex trading includes other mechanisms such as bids and offers, unrealized and realized profit and loss, pips, and margins. These concepts arise from the basic nature of forex trading.