Romancing the FOREX: A Basic Look at the Foreign Exchange Market

Forex is a global market for trading one national currency against another. In other words, it’s simply the buying and selling of money. The FOREX Currency Trading market however involves practically every national currency available and you do it on a global scale. FOREX is a coined term for Foreign Exchange Market. It is interesting to note though that there is no actual market place or an “exchange” in FOREX market, like you see in the stock market. Trading or the buying and selling of currency are done in a market place that is connected to each other electronically through inter-bank system, or with traders through the internet or via overseas telephone communication. It is this characteristic that makes FOREX the most accessible and liquid market for all levels of participants from around the world. A small trader with $50 generally has the same opportunities as someone with $50 million.A Little Track back in HistoryAlthough the currency exchange has ancient roots, the modern foreign exchange market traces its roots to the time when the Second World War was about to end. The Allied powers consisting of the United States, Great Britain and France seek to stabilize foreign exchange market through the Bretton Woods Accord. The Bretton Woods Agreement in the year of 1944 set the dollar at a rate of 35 USD per ounce of gold, the US dollar was made the common trading instrument and was pegged with other currencies. The foreign exchange rates established in the Bretton Woods Agreement were destabilized in 1971; the US dollar would no longer be exchangeable into gold. The free floating system was mandated which allowed greater freedom for currencies to fluctuate independent of the US dollar. The independent fluctuation provided by the free floating system gave the money market the necessary boost. It made the FOREX fluid and gave greater opportunity for global money traders to transact more profitably.The technology age in the 1980s accelerated the fast growing rate of extending the market for cross border capital movements through European, Asian, and American time zones. Foreign exchange transactions increased from about $70 billion a day to more than $1.5 trillion a day two decades later.

FOREX pairing…can someone please explain currency pairs?

FOREX trading is done in pairs. This is called currency pairing. For example, the US dollar can be paired with Japanese Yen and the code for this FOREX pair is USDJPY (or USD/JPY). These pairings are known as ISO codes (ISO stands for International Organization for Standardization which is a global federation of national standard bodies). The first currency of the pair (also known as the base currency) assumes 1 unit and the second currency (known as the counter currency) will reflect its value in number units of the counter currency (which can be greater or less than 1). For example it can be shown on the FOREX market that the pair USD/JPY has an exchange rate of 107.91. It only means that the 1 unit of US Dollar (the base currency) is equal to107.91 units of Japanese Yen (the counter currency). What does FOREX really represent?

Here is simplistic analogy to explain what a currency is?

Just as you see company value in terms of its share prices, (the share prices reflecting the relative strength and economic well being of a company), the currency is somewhat similar in reflecting the economic strength of a country. Just as you would study a companies balance sheet and its revenues which will ultimately determine the value of its share, a countries balance sheet (balance of payments, GDP etc) reflect the strength of that country and its ultimate reflection in its shares (its currency). It is a simplistic example as there are elements that you would not or could not value when looking at a country, and usually companies can be valued a lot easily. Determining the true value of a currency in relative terms has at best been a fleeting endeavor, hence the speculative growth and a level playing field for small and large participants alike.