Understanding The Basic Facts Of How The Forex Currency Exchange Works PDF Print E-mail
Written by Sandor Simon   
Monday, 07 June 2010 12:20
Forex, which stands for foreign exchange, is the most traded financial market in the world. Each trading day, over three trillion dollars in various world currencies are traded on forex around the world, by institutions, banks, and individual investors. Trading can take place 24 hours a day, Monday through Friday. Amounts traded on the forex currency exchange far exceed those of the major stock markets of the world. While the concept of foreign exchange is simple, the analytical methods involved can be quite complex.
by SandorSimon


Forex, which stands for foreign exchange, is the most traded financial market in the world. Each trading day, over three trillion dollars in various world currencies are traded on forex around the world, by institutions, banks, and individual investors. Trading can take place 24 hours a day, Monday through Friday. Amounts traded on the forex currency exchange far exceed those of the major stock markets of the world. While the concept of foreign exchange is simple, the analytical methods involved can be quite complex.

Forex involves the purchase of one currency and the simultaneous sale of another currency. Traders hope to take advantage of currency fluctuations and to make money when the value of one currency in relation to another changes in their favor. The worldwide value of currencies is influenced by many factors, including economic, political, and environmental.

Since a forex trade involves the sale of a particular currency along with the purchase of another one, transactions always occur in terms of currency pairs. The trading of the top seven currency pairs, called the majors, produces about 75 to 80 percent of forex activity each day. All the major currency pairs include US dollars, paired with other currencies like the Swiss franc, the euro, the British pound, Japanese yen, Canadian dollars, and others.

Not all trades which take place on the forex involve the US dollar, even though it is the main currency that is traded. There are other currency combinations, which are called cross currency pairs. Currencies such as the Japanese yen and the euro may be paired, or the Canadian dollar and the Swiss franc, to name just two possible pairings.

There are numerous technical indicators that are used by forex analysts and traders for the purpose of trying to anticipate changes in the price of currencies. Some of the indicators used are the relative strength index, also called RSI, the Stochastic oscillator, and Fibonacci number sequences. Forex signals rely upon the interpretation of forex indicators to suggest the best time for market entry.

There are two main ways in which analysts look at data connected with forex in order to try to predict the movement of currency price fluctuations so that traders may make the maximum amount of profits. In fundamental analysis, emphasis in placed on market trends, and what should happen in the future based on these. Data from political and economic sectors, along with such information as inflation rates and unemployment forecasts, are used to gauge how currency prices should be affected. In this type of analysis, the focus is on demand and supply.

Technical analysis focuses on the historical performance of a currency in order to forecast the future performance. Unlike fundamental analysis, it is not concerned with intrinsic value. It uses charts, graphs, and similar tools to identify patterns in currency fluctuation. While fundamental analysis focuses on what should happen in the market, technical analysis studies what actually has happened. Though fundamental analysis and technical analysis are considered to be opposites, both are usually used in determining investment strategy.

The concept of forex currency exchange is a very simple one, basically valuing one currency in terms of a second currency, with the aim of realizing a profit based on currency fluctuations. The complexity of the currency exchange market arises from the need to understand the analytical tools that supply information about what to invest in, as well as when. Time spent acquiring this understanding may pay off by allowing one to trade more intelligently. However, any investor would be wise to proceed with caution in a situation involving potential risk.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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