FOREX is an acronym for “Foreign Exchange”. The FOREX market just happens to be the largest market in the world, estimated at over $4 Trillion dollars per day! Currency trading used to be just for institutional investors, but since 2001, it has been rapidly growing among individual investors as well.
FOREX is based on the value of a particular country’s currency at a particular time. The value of that currency isn’t established by the World Bank, the Fed, a country, or a business. Rather, it is established by the market itself—supply and demand—what is taking place between all buyers and sellers in the market in real time across the globe. Because of this, it’s a very difficult market to manipulate.
How does this work? If the volume of people selling a currency is high, the price of that currency will fall. Conversely, if more people are buying this currency, the price will rise. But, there are factors that can come into play that could affect the currency price and cause it to move. The first is increasing the supply of money. This will decrease the value of a currency. Why? Because there would be more money on the market, but the same number of goods and services. Just think Federal Reserve. They are continually printing currency, and the value of the U.S. dollar is not as strong as it has been in the past. The second thing that can affect price is market speculation. Let’s say that the U.S. is expecting a good report on economic indicators and forecast. This could mean that investors are speculating that the economy will rise. Therefore, you may see the value of the dollar increase in this instance.
FOREX is always traded in pairs. It compares the relative value of one currency to another. For example, let’s look at the U.S. dollar to the Japanese Yen. This pair is USD/JPY. The first currency in the pair is called the Base, and the second is called the Quote. The current rate is 102.2, which means 1 USD = 102.2 Yen.
Why have so many individual investors and day traders started trading the FOREX? It’s really about trading odds. Because the market can only go two ways: up or down, so a trader has a 50/50 chance of being right. And, with an understanding and study of this particular market, those odds can be increased. Those traders who are successful in this market study it and observe patterns of behavior and look at what the market has done long term. By looking at those patters in the FOREX market, investors say it becomes easier to predict if a particular currency will go up or down.
There are a few other things that make the FOREX market appealing to many investors. First, in addition to trading online, the FOREX market allows investors to trade 24 hours per day, 7 days per week, as the market doesn’t actually “close”. This means traders can be active while other markets are closed whether it’s late nights or weekends. Second, FOREX investors can trade for the short-term or the long-term, depending on their strategy.
The video here explains pairs and currencies as a general overview and we will post new articles on FOREX in the future.
By C.E. Burnett