Introduction to Forex
The Basics of Forex Trading
Quoting Conventions
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the “basis” for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.
| Currency Abbreviations | |
| Symbol | Definition |
| EUR | Euro |
| GBP | Great British Pound |
| USD | US Dollar |
| CHF | Swiss Franc |
| AUD | Australian Dollar |
| CAD | Canadian Dollar |
| JPY | Japanese Yen |
| NZD | New Zealand Dollar |
| TRY | Turkish New Lira |
| ZAR | South African Rand |
EUR/USD
In this example euro is the base currency and thus the “basis” for
the buy/sell.
If you believe that the US economy will continue to weaken and this will
hurt the US dollar, you would execute a BUY EUR/USD order. By doing so
you have bought euros in the expectation that they will appreciate
versus the US dollar. If you believe that the US economy is strong and
the euro will weaken against the US dollar you would execute a SELL
EUR/USD order. By doing so you have sold euros in the expectation that
they will depreciate versus the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the
“basis” for the buy/sell.
If you think that the Japanese government is going to weaken the yen in
order to help its export industry, you would execute a BUY USD/JPY
order. By doing so you have bought US dollars in the expectation that
they will appreciate versus the Japanese yen. If you believe that
Japanese investors are pulling money out of US financial markets and
repatriating funds back to Japan, and this will hurt the US dollar, you
would execute a SELL USD/JPY order. By doing so you have sold US dollars
in the expectation that they will depreciate against the Japanese yen.
GBP/USD
In this example the GBP is the base currency and thus the “basis” for the buy/sell. If you think the British economy will continue to be the leading economy among the G8 nations in terms of growth, thus buying the pound, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/CHF
In this example the USD is the base currency and thus the “basis” for
the buy/sell.
If you think the US dollar is undervalued, you would execute a BUY
USD/CHF order. By doing so you have bought US dollars in the expectation
that they will appreciate versus the Swiss Franc. If you believe that
due to instability in the Middle East and in U.S. financial markets the
dollar will continue to weaken, you would execute a SELL USD/CHF order.
By doing so you have sold US dollars in the expectation that they will
depreciate against the Swiss franc.