Trading Currency Pairs
Investors, just like you, make money every day by trading currency pairs. By determining what is going to happen to a currency pair in the future, investors can act today to take advantage of coming price movements.
Currency pairs can do one of the following three things:
- They can go up
- They can go down
- They can go sideways
Before you can determine if a currency pair is going to be going up, down or sideways, however, you need to determine which currency in the pair is getting stronger and which currency is getting weaker, compared to the other currency. For instance, if you are looking at the EUR/USD (euro / U.S. dollar) pair, you have to decide if the euro is getting stronger than the U.S. dollar or if the U.S. dollar is getting stronger than the euro.
Note: The first currency listed in the currency pair is called the base currency and the second currency listed in the currency pair is called the quote currency. When you look at the price of a currency pair, it tells you how many of the quote currency it would take to buy one unit of the base currency.
If the base currency is strengthening against the quote currency, the currency pair will be moving up. If the quote currency is strengthening against the base currency, the currency pair will be moving down. If the base currency and the quote currency are equally strong, the currency pair will be moving sideways.
The following is a quick reference to help you remember which way a currency pair will be moving:
- Base > Quote = Up
- Base < Quote = Down
- Base = Quote = Sideways
Once you have decided which way the currency pair is going to move, you can place your trade. When trading forex, you can do one of the following three things:
- You can buy the currency pair
- You can sell the currency pair
- You can do nothing