The base currency is always the “basis” for the buy or the sell. In a sample of AUD/USD we would be buying the base currency [Aussie Dollars] and simultaneously selling [ US Dollars]. We are therefore long this particular pair as we have bought the base currency.
You would buy the pair if you believe the Aussie dollar will go up relative to the US Dollar [quote currency]. You would sell the pair if you think the Aussie Dollar[base currency] will go down relative to the US Dollar[quote currency].
Margin trading in the foreign exchange market is undertaken in “lots” A “lot” is the minimum amount to the currency you have to buy. These lot sizes are generally 10,000 for Mini accounts and 100,000 for standard accounts.
A CASE STUDY
You believe that the Aussie dollar will go down against the value of the US dollar. You decide to sell I lot [100,000] of the AUDI/USED pair at 1% margin which equates to $10 per pip. A pip is minimum amount the pair can move and is least number or decimal place in the quoted price.
You sell the Aussie dollar at 0.9000 against the US dollar . Approximately $1100.00 margin requirement would be set aside in your account when the trade is opened and you now control $US 100,000 worth of Aussie dollars. Your analysis proves correct and the value of the dollar declines to 0.8950, a 50 pip move in your favour.
You buy back the AUD/USD pair at 0.8950 and make a profit of $500.00 [50 pips at $10 per pip]. Your return on margin equates to around 45% return – $500 profit on a margin requirement of around %1,100.00