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How does forex trading work?
How does forex trading work?
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Written by Online Support
Updated over a week ago

How does forex trading work?

Forex is always traded in currency pairs – for example, AUD/USD (Australian dollar v US dollar). You speculate on whether the price of one country's currency will rise or fall against the currency of another country, and take a position accordingly. Looking at the AUD/USD currency pair, the first currency (AUD) is called the 'base currency' and the second currency (USD) is known as the 'counter currency'.

Some popular forex currency pairs include EUR/USD, EUR/GBP, AUD/USD, AUD/JPY, USD/JPY, USD/CHF, GBP/USD. Find out more about currency pairs.

When trading forex, you speculate on whether the price of the base currency will rise or fall against the counter currency. So in AUD/USD if you think AUD will rise against USD, you go long (buy) the currency pair. Alternatively, if you think AUD will fall against USD (or that USD will rise against AUD), you go short (sell) the currency pair. If you were right (that is if you went long AUD/USD and AUD went up in value against USD), you would make a profit. If the trade went against you, however, you would make a loss. To understand more about how currency pairs move, see our introduction to the factors affecting currency pairs.

In trading, a ‘pip’ is a very small price movement. The term is short for ‘percentage in point’. Traditionally, a pip is essentially the smallest move that a currency could make in forex trading. Learn more about pips in forex.

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