Forex Relationship of a Currency Pair

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Forex Relationship of a Currency Pair

Forex is also called the spot market because currency pairs are traded on the spot at current market prices. A currency pair is composed of two currencies wherein the first currency is called the base currency and the second is called the counter currency or the quote currency. And when we trade a currency pair, we are buying one and selling the other at the same time. In other words, Forex positions are always long and short of either currency but are neither long nor short concurrently - and that's the relationship of a currency pair.

If we were to take the EUR/USD pair for example, the Euro is the base currency and the US dollar is the quote currency. And since a currency pair is always long and short of either currency, a trader is said to be long EUR/USD when that trader is actually long Euros and short US dollars at the same time. And when a trader is said to be short EUR/USD, that trader is actually short Euros and long US dollars.

Given that description of the opposing relationship of a currency pair, we will now tackle the 'long' and 'short' slang in Forex. Basically, the term 'long' means that it's bought and the term 'short' means that it's sold. The long and short in the relationship of a currency pair describes a Forex trader's position in the spot market or it can mean an action in the trade.

A trader is said to be in the long position after that trader bought the base currency and sold the quote currency at the same time. On the other hand, a trader's said to be in the short position after that trader sold the base currency and bought the quote currency at the same time.

'Going long' and 'going short' describes actions in the spot market trade. A trader is said to be going long when that trader buys the base currency and simultaneously sells the quote currency. And a trader's said to be going short when that trader sells the base currency and simultaneously buys the quote currency.

We can describe the relationship of a currency pair as opposing because we are always long one currency and short the other when we open positions in Forex. This is also how trades are balanced out in the spot market where we trade money as opposed to stocks and commodities. Because when we open a position by going long, we close that position by going short and when we open a position by going short, we close that position by going long on that currency pair.

 
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