Forex for Absolute Dummies

Forex (foreign exchange) refers to the foreign currency

exchange market, the world’s largest financial trading

market. Pass yourself as a forex expert with these buzz

words:

•

Bid – to buy

•

Ask – to sell

•

Liquidity – financial ease of transaction, i.e. cash

•

Trading volume – the amount traded

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buying price and the actual selling price

Bid/ask spread – the difference between the proposed

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OTC – over the counter

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for instance, a Canadian dollar is valued at .86 of a US

dollar

Exchange rate – the difference between currency values;

•

control vast amounts of money and are able to

manipulate the value of a currency through speculation

Hedge funds – large mutual funds companies that

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usually exerts control over the value of that currency

Forex trading is the investment in the currency of one

nation. Multinational Corporations doing business across

national boundaries find value in keeping their cash

reserves in a variety of countries, and holding their funds in

a myriad of ways. For example, a UK corporation may hold

a percentage of its working capital in UK pounds, but if it

does quite a bit of business in USA it may also maintain a

percentage of its money in dollars, in US banks. Individual

investors over the decades have discovered that there is

profit to be made in investment and speculation in the

currency markets.

Take the case during the 70’s when the German DM swung

rapidly in value. It was worth anywhere from 1.2 marks

the US dollar to 3.5 US marks to the dollar. When the mark

was worth 2.5 it was beneficial to spend dollars buying

marks, since the mark would buy more goods or services at

that rate. As the mark bottomed out 1.7 to the dollar there

was less incentive.

Surprisingly, the forex market itself is not unified. One can

find many small forex markets specializing in trading

various currencies. The most commonly traded currencies

in forex speculation are the US dollar, the Australian dollar,

the British pound sterling, the Japanese yen, and the

European Euro. Currency values vary depending on the

market in which an investor is speculating, so there is really

no such thing as a single, unified dollar rate, but instead

there are multiple dollar rates, which vary according to the

market where the trade is occurring.

The major cities in which trades occur include New York,

London, and Tokyo. It’s a 24 hour process. When Asian

trading ends, European trading commences, and when

European trading ends, then American trading opens.

Naturally, when American trading ends, it is time for Asian

trading to open house once more… and so on.

Currently, the most actively traded currency is the US

dollar, involved in 90% of all trades. This is followed by the

Euro involved in 36% of all trades, then by the yen in 20%

and the pound in 17%.

Our fastest rising currency in trade is the Euro, however the

US dollar is still the favored anchor point-- and the

currency watched so as to judge how others will react.

Differences in value of currencies come from the current

events. GDP growth, inflation dips, interest rate swings,

budget and trade deficits, surpluses and other economic

conditions all shift currency values. Investors, for this

reason, follow the news very closely. There are 24 hour

cable news channels and many web sites devoted to news

that aid currency speculators.

The forex market is highly susceptible to rumors. In fact

the central banks of countries frequently manipulated local

currency value by sowing rumors about interest rate hikes

and other economic propaganda that impacts the value of

the domestic currency. When this news is false it is called a

dirty float- and it dismays the market.Central bank – the national bank of a nation, which

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