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Understanding FOREX Trading

Aug 17, 2007
The forex market exists when one currency is exchanged for another. It is the bigest market in the world, in terms of money traded and also includes trading between the central banks, big banks, currency speculators (like you), multinational governments, corporations, and many other players. The trading in the forex market across the globe currently reaches almost $2 trillion/day .

Currency speculators are a small part of this market, but by learning how to buy and sell currencies while at the same time protecting your money, you will be developing a very profitable skill. However, like with any new endeavour, before trading currencies an investor should learn the basic terminology of the FOREX market.

1. Currency prices

Factors such as economic and political conditions deeply affect currency prices. Political stability, inflation, and interest rates are all factored into the price of any currency. The price of currency can be controlled by governments who flood the market or buy extensively.

2. Volume of FOREX

No force can have dominate the market due to the volume of Forex. Market forces will prevail in the long run, making FOREX one of the most open and fair investment opportunities available.

3. World Currency

Each world currency is given a three letter code which is used in FOREX quotes. The most common currencies are USD (US dollars), EUR (European euros), GBP (United Kingdom pounds), AUD (Australian dollars), JPY (Japanese yen), CHF(Swiss francs) and CAD (Canadian dollars).

4. Foreign exchange prices

Every foreign exchange transaction involves buying one currency and simultaneously selling another so reading a foreign exchange quote may be a bit confusing at first but it gets simpler if you keep in mind that the first currency listed first is the base currency and that the value of the base currency is always 1.

Forex quotes can be used to determine prices of foreign exchange. The first currency is the 'base' and the second is the 'quote' currency. In this example: USD/EUR = 0.8419 the currency pair is US dollars and European euros. The base currency (USD) is always at '1' and the quote currency shows how much it costs to buy one unit of the base currency. In this example, 1 US dollar costs 0.8419 euros. Conversely EUR/USD = 1.1882 tells us that it costs 1.1882 US dollars to buy 1 euro. When the price of the quote currency goes up it indicates that the base currency is becoming stronger one unit of the base currency will buy more of the quote currency. The base currency is made weaker when the quote currency is weak.
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