The concept of buying and selling capital can be initially confusing because you're not buying any asset in exchange for money, like you do in the stock market, for example. Instead, you are simultaneously buying one currency and selling another, that is, doing an exchange.
In the stock market, traders buy and sell shares; in the futures market, traders buy and sell contracts; in the Forex market, traders buy and sell "lots". When you buy a currency lot, you are speculating on the value of one currency compared to another, that is, in the exchange rate itself.
Currencies are traded in pairs. The pair is written in a particular format, best demonstrated by way of two examples. The Euro and the US Dollar: EUR/USD or the British Pound and the Japanese Yen: GBP/JPY
Every purchase of one currency implies a reciprocal sale of the other currency and vice versa. This means that buying equals selling - curious isn't it? But the fact is that you are buying and selling the exchange rate, not a single currency.
Imagine if currencies would be traded single and you would want to buy 100 US Dollars. Do you think it would be easy to find someone offering more than 100 Dollars for the same amount? Probably not. The value of a currency does not change in itself, what changes is its value in relation to other currencies. This is a characteristic of a free floating exchange rate system, as you learned in the previous chapter.
If you hear another trader saying "I'm buying the Euro", he/she is expecting that the value of the Euro will rise against the US Dollar and speculates by buying the EUR/USD exchange rate. The trader's ability to anticipate how the exchange rate will move will determine if the trade will represent a win or a loss.
The first member of every pair is known as the "base" currency, and the second member is called the "quote" or "counter" currency. The International Organization for Standardization (ISO) decides which currency is the base and which one is the quote within each pair.
The exchange rate shows how much the base currency is worth as measured against the counter currency. For example, if the USD/CHF rate equals 1.1440, then one US Dollar is worth 1.1440 Swiss francs. Remember, the value of the base currency is always quoted in the counter currency member within the pair (hence the name "quote currency"). A simple rule to understand the exchange rates would be to think of the base currency as one unit of that currency being worth the value of the exchange rate expressed in the quote currency.


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Editors’ Picks
EUR/USD hits fresh one-month low amid souring market mood
EUR/USD has been extending its falls and dips below 1.21 as US retail sales badly disappointed and the worsening mood is supporting the safe-haven dollar. Markets digest Biden's stimulus plan. US Consumer Sentiment declined to 59.2 points.
GBP/USD retreats toward 1.36 amid fresh dollar strength
GBP/US has pared its gains and falls toward 1.36 as the dollar gains ground. The UK economy shrank by 2.6% in November, better than estimated. The UK is ramping up its vaccination campaign and PM Johnson is pressured to ease the lockdown.
USD/JPY drops to fresh daily lows near 103.60
USD/JPY is falling for the second straight day on Friday. Wall Street's main indexes look to open in the negative territory. 10-year US Treasury bond yield is down more than 2%.
Georgia voters evenly split over who should control US senate
Edison Research's poll found roughly half of voters would prefer the Republican Party to retain control and half would like to see the Democrats take over, reflecting how close the two races were likely to be.
Gold extends sideways grind near $1,850
The XAU/USD pair registered small daily gains on Thursday but struggled to extend its recovery amid a lack of significant fundamental drivers on Friday. As of writing, the pair was up 0.15% on a daily basis at $1,849.
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