Pair, Base and Counter Currency
Forex trading is a buying and selling pair or currency pairs. When you make a transaction, buy or sell a pair, then there are two actions that you do simultaneously. That is, the first when you buy or sell a pair then you buy or sell is the currency on the left side of the pair (pair). The currency on the left side of the pair is called the base currency. Secondly, you do the opposite for the currency on the right side of the pair (pair). The currency on the right side of the pair is called a counter currency or cross currency.
For example, if you buy a pair then you buy base currency and sell counter currency. Instead, you sell a pair then you sell base currency and buy counter currency.
Now let’s see how a trader can benefit by selling currency pairs. This concept is a bit more elusive than buying. It is based on the idea of selling something you borrow as opposed to selling something you have.
In the case of forex trading, when taking a sell position you will borrow the currency in the pair you are selling from your broker (this all happens seamlessly in the trading platform when trading is done) and if the price goes down, you will then sell it back to the broker at a price lower. The difference between the price at which you borrow it (higher price) and the price at which you sell it back to them (lower price) will be your profit.
For example, say you are sure that USD will fall relative to JPY. In this case you want to sell USDJPY pair. This means you will sell USD and buy JPY at the same time. You will borrow USD from your broker when you open position. If trading leads to profit, it means JPY will increase in value and USD will decrease. At the level at which you close your trading position, your profit from the JPY increase will be used to repay the broker for USD borrowed at the lower current price. After paying back the broker, then the rest will be your net profit.
More specifically, let’s say you sell USDJPY pair at 111.451. If the pair is down and the open sell position is closed / exit from the position at 110.801, then the trading profit will reach 65 pips. Conversely, if the pair does not move down but it rises to 111.731 position when the open sell position closes, there will be a trading loss of 28 pips.
In short, you can benefit from selling something you do not own.