Forex is an abbreviation commonly used for "foreign exchange" or "currency exchange" and is often used to describe the trading in the forex market by investors and speculators.
For example, imagine a situation in which it is expected that the value of the US dollar it will weaken against the euro. A forex trader in this situation will sell dollars and buy euros. If the euro strengthens, the purchasing power to buy dollars has increased. The trader now can buy back more dollars than you had to begin at a profit.
This is similar to stock trading. A stockbroker buy a stock if you think the price will increase in the future and will sell a stock if its price will fall think in the future. Similarly a forex trader will buy a currency pair if you expect the exchange rate to increase in the future and sell a currency pair if you expect the exchange rate to fall in the future.
WHAT IS AN EXCHANGE RATE?
The forex market is a global and decentralized market determines the relative values of different currencies. Unlike other markets, there is no centralized depository or exchange where transactions are carried out. Instead, these operations are performed by various market participants in various locations. It is rare that two coins have a value identical to each other and also rare that two currencies remain the same relative value for more than a short period of time. In Forex, the exchange rate between two pairs of currency changes constantly.
The forex market is a global and decentralized market determines the relative values of different currencies. Unlike other markets, there is no centralized depository or exchange where transactions are carried out. Instead, these operations are performed by various market participants in various locations. It is rare that two coins have a value identical to each other and also rare that two currencies remain the same relative value for more than a short period of time. In Forex, the exchange rate between two pairs of currency changes constantly.
For example, the January 3, 2011, one euro was worth about $ 1.33. On May 3, 2011, one euro was worth about $ 1.48. The euro has appreciated 10% against the dollar US during this time.
- EUR/USD Exchange Rate Example
WHY CHANGE EXCHANGE RATES?
Currencies are traded in an open market, such as stocks, bonds, computers, cars and many other assets and services. The value of a currency fluctuates as its supply and demand fluctuates, just like anything else.
Currencies are traded in an open market, such as stocks, bonds, computers, cars and many other assets and services. The value of a currency fluctuates as its supply and demand fluctuates, just like anything else.
- An increase in supply or a decrease in demand for a currency can cause the value of the currency falls.
- A decrease in supply or an increase in the demand for a currency may cause the value of the currency increases.
A great benefit of Forex trading is that you can buy or sell a currency pair at any time, subject to availability of liquidity. So if you think the euro zone will separate, you can sell the euro and buy dollars (sell EUR / USD). If you think the gold price will go up, based on historical correlation patterns, you can buy and sell Australian dollar US dollar (Buy AUD / USD).
This also means that in reality there is no "bear market" in the traditional sense. You can win (or lose) money when the market is trending to the upside or on the downside.
