Understanding Currency Exchange Concepts

Aug 29 • Currency Exchange • 3833 Views • 5 Comments on Understanding Currency Exchange Concepts

Mastering the basics is the key towards enjoying long-term gains in the currency exchange market. Various brokers and trading robots might advertise themselves to be the best picks for those who know nothing about trading. Some of those who do trade with these automated trading programs might experience successful trades.  But, these gains are not likely to be sustainable over a long period of time if the trader does not have a good grasp of foreign currency exchange trading market techniques and strategies.

Understanding the basic concepts is the best way to be profitable in currency trading. In addition, one has to continue learning along the way, keeping within manageable trading levels until he is able to move on to a bigger trading account. The currency exchange market or the foreign exchange (forex) market is the most liquid financial markets in the world.  The exchange of currencies is done round-the-clock with markets from different parts of the world opening as others are closing or winding down for the day.  There is no centralized exchange that consolidates all of the transactions all over the world.

It used to be that forex transactions are only open to banks, bigger financial institutions, and multi-national corporations.  Today, even ordinary consumers with no more than several hundred dollars as trading capital can take advantage of the fluctuating currency exchange values to gain profits.

The basic concept of forex trading is buying a lot of currency with its value in another currency.  The currency exchange rates are determined by different factors and are dictated by the exchange where the transactions are being consummated.  The currency that is being bought and the currency that is being used to make the purchase are called the currency pair – buying a lot of Euros for US Dollars would mean buying a USD/EUR pair.

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When a currency pair is bought and held, the forex trader’s goal is to be able to sell the same pair for profit.  This happens when the price of the currency he bought increases versus his buying currency.  In the example, the trader wants the value of the Euro to increase versus the US Dollar. A forex broker would quote buying and selling prices or bid and offer prices on currency exchange pairs.  The difference between the two is called the spread which is what the broker makes for his services.

With the accessibility of forex trading to more people today, the spreads are getting smaller with only those forex brokers who are trying to make more out of their customers’ transactions quoting wider gaps on their bid-offer prices.   The spread is indicated in terms of pips or the smallest increment by which the value of the currency pair can increase or decrease.  The trader’s gains are also often expressed in pips.

The challenge for forex traders is how to predict the movement of currency exchange prices so that they can make the decision to sell at a time when the prices are at their peak or buy when the prices are at their lowest.  The two ways of analyzing the market to determine price movements are technical analysis and fundamental analysis.  Technical analysis involves patterns derived from plotted price movements within particular time duration, while fundamental analysis involves political, social, and economic circumstances that affect currency prices.

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