The Foreign exchange is the where currencies can be traded. Currencies are important to all people around the world. From companies that engage in huge business transactions to people who use other currencies in their short trip to the Bahamas, Foreign Exchange is one of the busiest markets in the trading industry.
The need for other currencies is the number one reason why the Forex market is the biggest, most active, and liquid among all the financial market with that being said, the average daily value of currency being traded every day is around 2,000 billion U.S. Dollars.
Key Forex Concepts and Terms
The Forex market works like regular trading, wherein you are actually buying one currency while selling the other, this is why all the currencies are always quoted in pairs, because each currency is valued in relation to the other. In trading currencies you are using the earnings from the currency you sold to purchase the currency you are buying.
These Currency pairs are called quotes. These quotes are done in order to determine the exchange rate between two different currencies. So if for example you are interested in knowing the exchange rate between the EURO and U.S. Dollar the quote would appear as:
EUR/USD = 1.05
The currency that comes before the slash is called the Base currency and the one that comes after is the quote or counter currency. The number after the equal sign is determines how much the quote currency is worth when buying exchanging it with the Base currency.
In the Forex market, there are four major currency pairs. These pairs are the most widely used currency pairs any transaction.
Cross currency quote is the currencies being traded does not include the U.S. Dollar, this is not a rare occurrence in the Forex market, and these cross currency pairs expand the trading possibilities in the market.
This is one of the many reasons why many investors are interested in trading in Forex, compared to other financial tools, Forex offers a higher leverage than in stocks. Leverage is a concept in Forex that lets you borrow a capital in order for you to invest more in a position. Although this could be advantageous to a trader, one should be careful in using leverage as it acts like a double-edged sword.
Knowing where interest rates are going is very important so as better understand the economics of a country, especially when trading in Forex. For a simple explanation, countries that are doing well, economically speaking, and with an increasing rate of inflation will probably raise interests to minimize inflation.