One of the elements of currency trading that many novices find confusing is the notion of what exactly happens when you buy a currency pair. Since two currencies are involved, it is not as simple as just buying one currency. Instead, it involves borrowing one currency in the pair to buy the other. So, in reality, when you place a currency trade, you are always borrowing one currency to buy another. This allows you to profit whether the exchange rate is rising or falling.

This concept is best understood using examples.

Example Trade 1: Buying EURUSD

Any time a trader buys a currency pair, they are expecting the exchange rate to rise in value. As such, they are borrowing the second currency, and buying the first. For instance, if a trader buys 100,000 units of EURUSD, they are borrowing US dollars to buy 100,000 euros. If the exchange rate is such that 1 euro buys you 1.5000 US dollars, then the trader will need to borrow 150,000 US dollars to buy 100,000 euros. Now, if the exchange rate rises to 1.5100, the trader can sell their euros for 151,000 US dollars. After returning the 150,000 US dollars they borrowed, the trader now has a 1,000 USD profit.

Example Trade 2: Selling EURUSD

If a trader were to sell EURUSD, they are expecting the exchange rate to fall. As such, they will borrow the first currency -- Euros -- so that they can buy the second currency, US dollars. In the first example, we had the trader buy 100,000 euros; in this one, let's say they are borrowing 100,000 euros, which, at an exchange rate of 1.5000, will allow them to buy 150,000 US dollars. Now if the exchange rate falls to 1.4900, they can repay the 100,000 euros they borrowed with just 149,000 US dollars -- thus leaving them with 1,000 US dollars in profit.

You'll notice the trades are virtually identical; it's as easy to profit if the market is rising as it is if the market is falling. And in either case, the quantity you are buying or selling -- in this case, 100,000 was the number we used -- always refers to the first currency of the pair: you are either buying that currency by borrowing the second (when you're buying the pair), or you are borrwing the first currency to buy the second (when you're selling the pair).

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