When you trade, you will always trade a combination of two currencies. For example, you will buy US dollars and sell Japanese yen. Or buy the Euro and sell Japanese yen, or any other combination of dozens of widely traded currencies. But there is always a long (bought) and a short (sold) side to a trade, which means that you are speculating on the prospect of one of the currencies strengthening and one of them weakening. The trade currency is normally, but not always, the currency with the highest value. When trading US dollars against Japanese yen, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD1,000,000. When closing the position, the opposite trade is done, again USD1,000,000. The profit or loss will be apparent in the change of the amount of yen credited and debited for the two transactions. In other words, your profit or loss will be denominated in Japanese yen, that are known as the price currency. As part of our service, a good broker will arrange automatic exchange of your profits and losses into your base currency if you require this.
This way of trading is different to the futures markets, for example, where the Euro, pounds and yen are the fixed trade currency, resulting in a US dollar denominated profit or loss. You can, however, also choose to trade in this reciprocal manner in foreign exchange markets but it is not the norm.
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- Forex? What is it, anyway?
- Incline for the total trade of forex
- The currency pair
- European Currencies
- Currency trading
