Buying a currency from a currency pair

In the currency pair GBPUSD, when you buy the currency does it refer to buying GBP?

When you sell the currency, does it mean you sell GBP which is the base currency?

You are buying the GBP and selling the USD. So your actually buying and selling different currencies at the same time. It’s a well known analogy in the forex world to think of this as a tug of war between currencies and the middle point of the rope is the current price of the market.

Hope that helps :slight_smile:

[B]In the forex market, you never buy or sell any currency.[/B]

There are basically two different positions which you can take in the forex market:

You can take a LONG position in a particular currency pair, in which case you are speculating that the BASE CURRENCY will gain in value versus the CROSS CURRENCY — and/or the CROSS CURRENCY will decline in value versus the BASE CURRENCY. This is loosely referred to as “buying” the currency pair. Or…

You can take a SHORT position in a particular currency pair, in which case you are speculating that the BASE CURRENCY will decline in value versus the CROSS CURRENCY — and/or the CROSS CURRENCY will gain in value versus the BASE CURRENCY. This is loosely referred to as “selling” the currency pair.

I said that these positions are “loosely” referred to as “buying” and “selling”, because those terms are commonly used by forex traders, although they are technically wrong. In the forex market, you never buy or sell anything.

When you take a position (long or short) in any currency pair, currency is not exchanged by your broker, currency does not change hands, and there is no change of ownership of any asset. You simply have a speculative position which is similar to a wager, in which you will show a profit (on paper) if A occurs, or you will show a loss (on paper) if B occurs.

When you close your position, your paper profit (or loss) will be booked to your account. That is, forex is a cash-settled transaction, [B]carried out entirely in the currency in which your account is denominated.[/B]

If you have an account with a U.S. broker, in which you have deposited U.S. dollars, and if you take a position in GBP/JPY in this account, your dollars WILL NOT be used to buy or sell pounds or yen. In fact, your broker probably DOESN’T EVEN OWN any pounds or yen. Depending on the position that you enter, and depending on what the GBP/JPY price does, you will enjoy a profit, or suffer a loss, in U.S. dollars — not in pounds or yen.

We will never get away from the “buy” and “sell” terminology in forex. But, it’s important for you to understand that this is just a shorthand way of describing a LONG or SHORT forex position which involves NO buying or selling.