How Currencies Are Traded, Understanding FOREX Quotes, and Market Structure- Part Two

A currency can never be traded by itself. So you can not ever trade a EUR by itself. You always need to compare one currency with another currency to make a trade possible.Some of the common PAIRS are:EUR/USD Euro / US Dollar "Euro"USD/JPY US Dollar / Japanese Yen "Dollar Yen"GBP/USD British Pound / US Dollar "Cable"USD/CAD US Dollar / Canadian Dollar "Dollar Canada"AUD/USD Australian Dollar/US Dollar "Aussie Dollar"USD/CHF US Dollar / Swiss Franc "Swissy"EUR/JPY Euro / Japanese Yen "Euro Yen"The listed currency pairs above look like a fraction. The numerator (top of the fraction or "left" of the / however you want to SEE it) is called the base currency. The denominator (bottom of the fraction or "right" of the /however you want to SEE it) is called the counter currency. When you place an order to buy the EUR/USD, for instance, you are actually buying the EUR and selling the USD. If you were to sell the pair, you would be selling the EUR and buying the USD. So if you buy or sell a currency PAIR, you are buying/selling the base currency. You are always doing the opposite of what you did with to base currency with the counter currency.If this seems confusing then you can always get by with just thinking of the entire pair as one item. Then you are just buying or selling that one item. Thinking like this will still enable you to place trades. You only need to be aware of the base/counter concept for Fundamental Analysis issues.So why is it important to know about the base/counter currency now? The base/counter currency concept illustrates what is actually taking place in a FOREX transaction. Some of you reading this know that short-selling was restricted in the stock market *(Shortselling is where you sell a stock/currency/option/commodity first and then try to buy it back at a lower price later). But in the FOREX you are always buying one currency (base) and selling another (counter). If you sell the pair you are simply flipping which one you buy and which one you sell. The transaction is essentially the same. This allows you to short-sell with no restrictions!You want to be able to short-sell with no restrictions so you can make money when the market drops as well as when it rises. The problem with traditional stock market trading is that the market has to go up for you to make money. With FOREX trading you can make