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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 When you buy a currency lot, you are speculating on the value of one currency compared to another, that is, on the EXCHANGE RATE ITSELF.
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 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. 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.