I’m sure you understand that the game is to predict what one country’s currency value will be compared to another country’s currency in the future… the foreign exchange rate. You indicate your predition by placing an order with your broker on the pairs your broker makes available to you. ie USD/CAD, EUR/USD etc
Placing a long (buy) order means you will make a profit if the base (first) currency increases in value against the 2nd currency of the pair at the time you close the order. A Short (sell) order means you will make a profit if the base currency decreases in value against the 2nd currency at the time you close the order.
Now if the concept of selling something you don’t own is what’s got you, then think of it this way… [I]"[B]The concept of short selling involves borrowing stock you do not own, selling the borrowed stock and then buying and returning the stock when the price drops.[/B]" [/I]…
So in forex market:
For a long order you are “buying the first currency” with the “borrowed money of the second currency”;
For a short order you are in effect “borrowing the first currency” to “buy the second currency”.
The “margin used” part of your account balance is like what is being held as collateral for the “borrowing” part while an order is open.
[U][B]So to recap[/B][/U]
if you buy the USD/CAD pair, you are buying USD with borrowed CAD dollars (when you close you are paying back the CAD with USD and if the USD went up you are left with a profit, otherwise you pay the difference from your account balance (a loss )
if you sell the USD/CAD pair, you are borrowing USD to buy CAD (when you close, you are paying back the USD with CAD so if the CAD went up then you have a profit, otherwise you pay the difference from your account balance (a loss).
The only actual exchange rate you ever have to deal with is between you and your broker if they require a different currency when you send in your initial margin, or hopefully later when you withdraw it.
Phew…Hopefully that helps 