Forex Trading

Forex Trading is buying and selling of currency pairs. The Gbp/Jpy is a currency pair of the Great British Pound and the Japanese Yen. The first component of each pair is known as the Buyer, while the second part is the Commodity.

If the current price of the Gbp/Jpy is 136.52, this means that 1 Gbp can buy 136.52 Japanese Yen. If 1 Gbp is divided by 136.52  the result = 0.0073249 which indicates that 1 Jpy can buy 0.0073249 Gbp’s.

That is why the pair is shown as Gbp/Jpy since the resulting price value of the pair is derived from the Buyer divided by the Commodity. In the above example, the Buyer being 1 Great British Pound, divided by the Commodity being the Japanese Yen at the value of 0.0073249 Gbp = 136.52 when the commodity is not rounded down.

If we were to describe the same currency pair the other way around, it would be Jpy/Gbp = 0.0073249. Naturally it is a simpler way of keeping track of the value as a Gbp/Jpy, as opposed to dealing in fractions.

When we buy the Gbp/Jpy, and later sell it, the difference in price between the initial buying price and the latter sale price is either a profit or a loss.

It is important to realise that the currency that is being bought or sold is a commodity, just like apples or pears.

It is simple enough to understand how if something is bought for \$1.00 and after that it is sold for \$1.10 that \$0.10 profit was made, yet how is it possible to sell something first, and buy it back later for a profit or a loss?

In theory it would be nice to sell an apple for \$1.00 and later when the price of apples has dropped,  I buy an apple for \$0.50 meaning I made \$1.00 – \$0.50= \$0.50 profit. But I didn’t have any apple to start with…?

But how does this actually work in the real world? Think about it in a different way and it becomes easier to understand. Let us say my friend has an apple, and I loan 1 apple from him. Since I believe that the price of apples is going to drop, I then sell my friends apple for \$1.00, and 1 week later I buy an apple at \$0.50. I then take the apple I just bought, and give it back to my friend. He is happy, I loaned his apple and I returned his apple. Yet I made \$0.50 out of the deal.

So in truth, when we go short (sell) a currency pair, we are selling the loaned commodity which we buy back later and return the commodity to the loaner, which in our case is the broker.

You can see a general description of the Forex Market at Wikipedia.org

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