This introduction is for absolute beginners in Forex trading. If you don’t need to refresh your mind on basics go ahead and skip to the next section:Mechanics of Forex Trading.
What Is Forex?
What Drives The Forex Market?
Exchange Rates.
1. What is Forex ?
No prizes for answering the above. The word Forex consists of two words FOReign and EXchange.
Definition: Forex is a cash market where currencies are traded against each other
The word can be shortened to FX hence the full name for this site becomes Foreign Exchange Academy.
The Forex market is not exactly a single physical location. It can be in a bank, forex bureau, travel agent or wherever trading of one currency for another occurs.
It is an over the counter market. Major Buyers and sellers are banks, governments, corporation , investors, private individuals .These parties exchange currencies at the current going rate known as the spot price.
2. What Drives the Forex Market?
Different countries use different currencies, however cross-border trade has to take place.
The Forex market is therefore a vehicle driven by the need to move monetary payments across borders and transfer funds and value from one currency to another. If the whole world used one currency there would be no need for the forex market.
For example if a US restaurant needs to buy Italian cheese it needs Euros to pay the Italian cheese maker so it must be able to exchange US dollars for Euros.
Likewise if the US restaurant makes the payment in US Dollars the Italian cheese maker must be able to change the Dollars into Euros. It’s as simple as that.
3.Exchange Rates?
What then is the rate used to exchange one currency for another?
How many Euros are exchanged for one US Dollar?
This rate is where the ‘Forex game’ begins. What does this rate depend on?
Several conditions affect the rate of one currency against the other. The most significant factors that move currency rates are interest rates, global trade, inflation, and political stability.
Many other factors determine currency rates and these will be examined next.
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