Category:Forex Trading

Forex Trading

The foreign exchange market (also known as the currency exchange market) is where currency trading takes place. It enables banks, financial institutions and individuals to buy and sell foreign currencies. What this means, is that one of the parties can buy a quantity of a one currency in exchange for buying a quantity of a different currency.

Currency values fluctuate, enabling forex trading to take place. This is when a trader pre-empts the direction that a currency will go in, to hopefully yield high returns. If a quantity of a currency is bought at a set price and its value increases, then the trader can sell the currency at a later date for the new higher price and profit from the difference. A forex trader’s goal will be to gain from foreign currency movement.

Currency trading is sensitive to economic and political factors, resulting in a forever unpredictable market. Hence the potential for capital gains can be huge, if a currency is traded wisely.

How are the rates of currencies represented? Currency rates are represented relative to one another i.e. how much of one currency is needed to buy another.

They are quoted in pairs. For example, USD/EUR = 0.7037. This means that it costs 0.7037 Euros to buy 1 US dollar. The first currency, in this case the US dollar, is known as the ‘base’ and it is always written first and with a value of 1. The second number is the ‘quote’ currency and it shows the price for 1 unit of the base currency. Forex trading becomes more interesting as the strength of currencies begin to change. In our example above, if the US dollar becomes stronger, then the quote currency rises, since it will take more Euros to buy 1 dollar, or alternatively, for each 1 US dollar, a trader will receive more Euros. Similarly, if the US dollar weakens, then the quote currency goes down, and it costs less in Euros to buy one US dollar, or for each US dollar you will receive less Euros.

What does this mean for the average person on the street? This could affect a person is several ways. Take the pair USD/EUR where the Euro applies to someone living in France: A strong US dollar means that a Frenchman will find it more expensive to buy US imports since each dollar’s worth of goods will cost more Euros that it did previously. Similarly, an American travelling to France will find it ‘cheaper’, since for every dollar that they exchange, they will get more Euros in return and will therefore have more Euros to spend for what they may have received when the US dollar was weaker (i.e. when the ‘quote’ currency was lower)