February 9, 2014
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Simple Explanation of Foreign Exchange

Foreign Exchange

Foreign exchange is considered complicated by those who have not truly studied all the ins and outs. You may feel right now that it is a complicated beast to learn; however, if you read through the various forex lessons provided, use a demo account, and keep updated on current events, news, and technical data it will seem less troublesome. The main reason forex is considered difficult to learn or trade is because you deal in currency pairs. Stocks you know that when you trade money you have bought shares in a company. When you buy one currency you sell another. If the currency pair you are dealing with is not in your domestic currency then there is another sale in order to buy the currency you want to sell in order to buy another. Take a look at the basics before getting into the more difficult topics.

Foreign Exchange is Done Every Day

Anyone who has ever travelled to another country has most likely used foreign exchange. You either went to the bank before you left and ordered money or you found a place at the airport to exchange the money you had in your wallet/purse into the country’s currency you were visiting. This is foreign currency exchange at its simplest.

You had to trade your currency at the travel counter for the current day’s exchange rate, which is set by the interbank. This rate has any fee applied that the airport bank or your regular bank needed to charge to make up for the exchange they made to get you the currency. You might see 1 AUD equal to 90 Yen and think you have a great deal. Your $10 AUD just turned into 900 Yen. Unfortunately, if you made your way to a shop to buy a soda using Yen you just spent much of your cash. You might see soda for 100 yen, which in your mind is expensive and in Japan is typical of their currency system. The overall point is that if you go to an airport counter to exchange your funds for a different country’s funds you participated in the foreign exchange market. Your return home requires you to exchange the funds you have left over, but the rate might be different that day. On that day you may see the rate at 101 Yen to 1 AUD, thus change is a good thing in terms of profit for AUD.

Foreign Exchange Volume

The reason many decide to invest in foreign exchange is the amount of volume to be found on any given day. The market deals in $5 trillion USD daily for volume. The NYSE sees about $22.4 billion USD traded each day. It is a huge difference between markets – a near 200 times difference, in fact.

For spot market traders in foreign exchange about $1.49 trillion USD in volume is traded. The rest of the trillions are traded by the banks, corporations, governments, and the other types of forex transactions like ETFs, ETNs, futures and options. You still have over a trillion in volume, which is larger than all other financial markets.

 

 

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