Saturday, May 10, 2008

What is Forex?

What is Forex?

Forex stands for foreign exchange, something that has been revolutionized by the creation of the Internet. Foreign exchange is not a new concept and has been around for many years, but now is much easier since forex trading is available online.With more than triple the amount of the United States Treasury and Equity combined, the forex market is the largest in the world. More nearly two trillion dollars changes hands daily across the world, but unlike other markets it has no central exchange, and it has no physical location.Instead, the foreign exchange market works through a network of corporations, banks and individuals trading one currency for another. Although some people are worried about the lack of physical exchange, it gives the foreign exchange market the ability to work 24 hours a day.When forex first began, the only way that retail investers could gain access was through the banks that handled the large transactions of different currencies for investment and commercial purposes. Since 1971, when exchange rates were first allowed to float freely, there has been a rapid increase in trading volume. Currently, the FOREX market is being used by international portfolio managers, speculators, day traders, importers and exporters, long-term holders and hedge funds to make transactions in financial assets and to pay for goods and services.Forex trading is always spoken of in terms of two rates of currency. Let's take an example. Say the Japanese yen exchange to United States dollar rate was 2.507 to 1 one day and an investor went in and bought 1000 Japanese yen. Their cost would be $2507 United States dollars. Depending on whether the value of the yen rose or fell, the person who bought those yen would either gain or lose on their investment. Although there are many factors which help to decide what the exchange rates for currency will be, one of the main determining factors is supply and demand. The value of a currency due to supply and demand is not governed by any one factor but several different factors instead.

Economic factors

Whenever you are dealing with money, one of the biggest determining factors, of course, is going to do with economics. These include the surpluses or deficits of the government's budget, balance of trends and trades, trends and levels in inflation, and economic health and growth.

Political Conditions

Any instability or upheavel in a nation is going to have a negative impact on a nation's currency. On the other end of the spectrum, there could be a positive influence on currency rates if the country is doing well and the government of the country is looked upon favorably.

Market Psychology

The foreign exchange market can also be influenced by perceptions of traders and market psychology in many ways. Some of these ways include long term trends, flights to qualify, 'buy the rumor, sell the fact', economic numbers, and considerations for technical trading. Unlike with the stock market, there is very little or no insider information. The fluctuations in the exchange rate of currency are caused by money changing hands and what people expect will happen in regards to money flows.

No comments: