The Rise and Fall of Currencies

Forex trading is an exciting way to invest. Traders earn money through buying and selling currency. The aim to sell for more than you bought it for. This simple principle is seen throughout the world of business and investing.

Why Do Currencies Fluctuate?
The Foreign Exchange (Forex) is in operation 24 hours a day, 7 days a week. People are trading in Forex all of the time. The Foreign Exchange is the largest trading market in the world. Trillions of dollars in currency are literally traded every single day on the Foreign Exchange. Each day, as currencies are traded; bought and sold, you will see the rates of currencies continually rising and falling. Currencies from around the world are in a constant state of fluctuation.

How Do Currencies Fluctuate?
Although if you were to go back in the history of currencies, you would find that previously the value of a currency was based on the amount of gold that the country held. The USA and other developed countries made a decision to change this system and to base the value of currency on the gross domestic product of each individual country. This is the system that we still find in use today.

When it comes down to the complex task of deciding the rate for each currencies, demand for that currency is the major deciding factor. Currencies are subject to two types of demand, Transactional Demand and Speculative Demand. Transactional Demand is calculated by the country’s economic growth, the employment rate in the country as well as how quickly money moves through that country’s economy. Speculative Demand is calculated by forecasts related to whether the currency is expected keep the value that It is at. This is assessed by projected, future economic activity, any inflation that might be anticipated and more.

The Foreign Exchange market trades continually and operates non-stop. It is a worldwide market and therefore an hour that might be nighttime in your home country could be the middle of the day somewhere else. Activity is happening all of the time in the world of Forex and rates are rising and falling continually.

Currencies Affect One Another
Currencies all relate to one another at the end of the day. They are compared against one another and they are bought and sold against one another, in what is known as currency pairs, and they are constantly measured against one another. Currency rates are affected by a whole host of factors.

One significant factor that has not yet been mentioned yet that has a large impact on currency rates is interest rates. Every country has their version of a central bank. It is the central bank in each country that sets the interest rates for lending and borrowing. These interest rates also affect the rate at which their currency sells for. It is measured against other currencies using rather complex formulas. Determining currency rates is not an exact science because speculation is involved. Therefore there is risk involved in this process. Carry traders, which can almost be described as middle men, bear the brunt of this risk. There is a chance that they will lose money because of this. At the same time, there is a chance that they will speculate correctly and earn extremely large sums of money because of it.

Major Forex Currencies & Currency Pairs

As you familiarize yourself with Forex trading and the trading platform, there are some basic Forex principles that you will need to understand as well as some common Forex terminology. In fact, even before you make your first trade, you will need to understand what base currencies and counter currencies are. Your first trade and every other trade you ever make will involve these two variables.

Main Forex Currencies

Although Forex trading involves every currency imaginable, there are certain currencies that tend to be the bedrock of the trading that happens in Forex. These in many ways can be considered the major (or the main) Forex currencies. I will begin by saying that the US Dollar is generally involved in most of the Forex trade that takes place. While this is generally true there are other currencies that at times are used in the same way. The most commonly used currencies used in Forex trade are the Japanese Yen (JPN), the Great British Pound (GBP), the Swiss Franc (CHF) and the Euro (EUR).

Whenever an investor buys or sells currency on the Foreign Exchange, they must first choose the currency that they are making the purchase in. It does not have to be bought in the currency of their particular home country. This means that someone living in the United Kingdom can choose to buy Euros using US Dollars rather than their native Great British Pound (GBP). The currency that is used to make the purchase is known as the Base Currency or the Primary Currency, while the currency that is purchased is called the Counter Currency. The Counter Currency together with the Base Currency is considered a currency pair.

What is a Currency Pair?

Currency pairs describe the combination of the purchased currency paired with the base currency. A currency pair usually looks something like the following: EUR/USD. The three lettered symbols in a typical currency pair represent a particular currency. EUR/USD stands in place of the words Euro / US Dollar. The top symbol in the fraction is what is known as the Numerator while the lower number is called the Denominator. Therefore in the example above, EUR would be the Numerator. If you placed a “BUY” in the instance of the example above, you would be selling the US dollar and buying the Euro. In the world of Forex, going “LONG” describes the act of buying currency.

Forex trades non-stop, 24 hours a day. Currencies are in a constant state of fluctuation and paired currencies potentially shuffle up and down against one another constantly, 24 hours a day. Throughout any given 24 hour period both the base and the counter currency can be expected to fluctuate; going up and down against one another non-stop. This movement is how the Forex investor makes money. The goal is to make money by selling currency that they have bought at a much higher rate than they bought it. Investors watch the market and strategically aim to sell currency for profit.

Forex for Beginners

What is Forex?
The word Forex is short for Foreign Exchange.  Forex trading or Foreign Exchange trading describes the buying and selling of foreign currencies.  This can be done because the value of currencies around the world fluctuates continually, day and night.  Anyone that purchases a currency at one rate and then sells it on at a higher price can make money through Forex. 

Although the definition above is quite basic, Forex trading really can be as simple or as complex as you are willing to take it.  As with anything new that you want to get involved with, I recommend starting slow, learning the ground rules, familiarizing yourself with the basics and the terminology, and then choosing to approach things at a deeper level when the time is right.

Benefits of Forex Trading:
Requires a small initial investment
Potential for large returns
Low-Risk form of investment
Relatively low risk way to invest

Forex trading is a form of investment that does not require huge amounts of capital upfront.  You can ease your way into Forex trading and re-invest returns as a way of developing your investment skills and your funds.  In addition to this, Forex trading, although fairly low risk can potentially earn you high revenues.  This means that anyone has the potential to be a good Forex trader.

Does Forex Trading Have Risks?
There are risks involved with Forex trading.  Whenever you fork out money on an investment, there is always the risk, however small, that you will not get a return on your investment.  The important thing for the new Forex trader to know is how to manage the risks involved with Forex trading. 

Many factors affect the direction that a currency moves in.  Some things can be seen ahead of time, such as elections being held in a volatile political situation, other things can not be foreseen so readily, such as a natural disaster or unexpected conflict.  One way to minimize your loses is by setting up an automatic order to sell should the currency that you have purchased fall below a certain price.  In this instance, you would still suffer some loss because the currency fell however it would not be a devastating loss because the automatic sell order would place a cap on the amount of that loss.

How Can I Start Trading Forex?
Forex is traditionally traded through a Forex broker.  This is someone that you would contact to purchase the currency you are interested in for you.  These days, most of this would be done online using the trading platform provided by your broker.  A trading platform is an online console that allows you to get up to the minute information on what is happening with currencies.  It also gives you the ability to trade currencies conveniently through the console or through the web site of your broker. 

Although many investors overlook the option of trading Forex, it is a viable way of invest.  Once you have gained a basic understanding of the factors that affect the direction of a currency, you will also gain the confidence to take the fullest advantage of the Forex trading opportunity.