How a Currency Trade Works
The way a currency is simultaneously bought and sold during a trade is confusing for many new traders, so an example will help clarify what happens under the hood of a currency trade. Assume for a minute that you are interested in buying the British pound against the U.S. dollar, which is listed as GBP/USD in your trading software. The base pair is the British pound; the quoted pair is the U.S. dollar. If the quoted exchange rate is $1.59 and you are trading one standard lot of currency, it will require 159,000 dollars to buy one British pound, or it will require selling 100,000 pounds to buy 159,000 dollars.
Since we are interested in buying the pound, we want the exchange rate to increase, allowing us to sell our pounds at a higher rate for more dollars than we sold to buy the original 100,000 pounds. As an example, Table 1.5 illustrates how a currency trader realizes a profit or a loss using a single standard lot GBP/USD currency trade.
Categories:
Forex,
Trade Machanics
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