The Basics of Foreign Exchange

There are more creative and productive ways to use your money than just letting savings sit in a bank. One of these is through Foreign Exchange Trading. If you are up to the challenge, it may be for you.

There are two reasons to trade in Forex. First, companies and governments that import/export products and services internationally need to convert earnings to their local currency. The second reason is purely for profit, based on predicted future quotes.

Foreign Exchange is the trading of currencies. Currencies are bought and sold in pairs - for instance, US Dollar/Japanese Yen (USD/JPY), or Euro/US Dollar (EUR/USD).

Major currencies include the US Dollar, British Pound, Euro, Japanese Yen, Australian Dollar, Canadian Dollar and Swiss Franc.

To understand Forex quotes, remember two things: 1) The currency listed first is the base currency and 2) the value of the base currency is always one.

The US dollar is the centrepiece of the Forex market and is considered the 'base' currency for quotes. Quotes in these and other currencies are expressed as a unit of $1 USD for each second currency quoted in the pair. For instance, a quote of USD/JPY 130.02 means one U.S. dollar is equal to 130.02 Japanese yen.

When the U.S. dollar is the base unit and a quote goes up, it means the dollar has appreciated and the other currency has weakened. If the USD/JPY quote increases to 135.01, the dollar is stronger, because it will now buy more yen than before.

Cross currencies are pairs that do not involve the U.S. dollar.

There are different factors that drive the Foreign Exchange Market - These are gold and oil prices.

Higher gold prices often have a positive effect on the currencies of major gold producers, like Australia and Canada, as these countries are the world's third largest exporter and producer of gold, respectively.

A country's foreign dependence on oil makes its currency more susceptible to oil prices than other countries. More costly oil means higher expenditure, and lower income, for companies.

Forex traders belong to two different schools of market analysis - fundamental and technical. They use either, or both, to predict future price of currencies

Fundamental analysis attempts to predict price action and market trends by analysing economic indicators (forecast of the upcoming GDP or employment report), government policy, and social factors in a country. The fundamentalist can predict market behaviour, and calculate approximate future prices, by using past values.

Technical analysis is a technique of forecasting price movements by looking at market-generated data. Price data, volume, and open interest from a particular market, are information analysed by a technician. Charts from technical analysis present an illustration of the historical price action of what is being studied. Traders look at a chart to know if they are buying at a fair price, selling at a recurring top, or throwing their capital into an uneven, slanting market. These are just a few market circumstances that charts identify for a trader


Trading in exotic currencies

There are three fundamental risks to consider when investing in exotic currencies: economic development, political stability, and transparency. All these form an estimate as to the currency's strength and reliability.


The Basics of Foreign Exchange

Forex trading can be intellectually challenging and financially rewarding. It is extremely risky, though, and one must understand basics like quotes, forex market drivers and forecasting future quotes. To be able to forecast future quotes, traders use two different methods of analysis, the fundamental and technical analysis.