Forex, which stands for foreign exchange, is the most traded financial market in the world. Each trading day, over three trillion dollars in various world currencies are traded on forex around the world, by institutions, banks, and individual investors. Trading can take place 24 hours a day, Monday through Friday. Amounts traded on the forex currency exchange far exceed those of the major stock markets of the world. While the concept of foreign exchange is simple, the analytical methods involved can be quite complex.
When traders make forex transactions, they are buying one currency and at the same time selling the equivalent amount of a second currency. World currencies change in value relative to one another almost constantly, responding to such influences as politics, economic climate, environmental factors, and so on. A trader on forex hopes to make money when the currency he is trading changes in value in his favor.
Because forex involves the sale of one currency and the purchase of another, trading always includes currency pairs. There are seven currency pairs, referred to as the majors, which account for 75 to 80 percent of the daily forex trading volume. The majors all involve US dollars in various relationships to other world currencies, such as the euro, the British pound, the Japanese yen, Canadian and Australian dollars, and others.
Though the US dollar is the main currency against which other currencies are traded, there are trades which do not include it. These are called cross currency pairs. In these transactions, non-US dollar currencies are traded against each other. Some cross currency pairs include the euro versus the Japanese yen and the euro against the Swiss franc, and many others.
Forex traders and analysts use various technical indicators in order to try to predict movement in currency prices. Some indicators used include number theory, such as Fibonacci number sequences, relative strength index, and the Stochastic oscillator. Related to forex indicators are forex signals, which are used to determine the timing of market investment using data from forex indicators.
There are two basic types of analysis that are performed on the forex market to try to determine how currency prices will move, in order for the trader to maximize profits. Fundamental analysis is one of these, and focuses on what ought to happen in the market, using market trends to predict future value. It uses data on the economy, political climate, unemployment forecasts, inflation, and other factors relevant to the currency of a country, and analyzes how those data should affect it. It is more focused on supply and demand than technical analysis is.
Unlike fundamental analysis, technical analysis looks at the history of a currency and its fluctuations and on this basis predicts future movement. It does not concern itself with the intrinsic value of a currency. Using graphs, charts, and other tools, it tries to identify patterns in currency valuation. Technical analysis is focused on what has happened in forex, not what should happen. In practice, both technical analysis and fundamental analysis are used to formulate investment strategies.
The concept of forex currency exchange is a very simple one, basically valuing one currency in terms of a second currency, with the aim of realizing a profit based on currency fluctuations. The complexity of the currency exchange market arises from the need to understand the analytical tools that supply information about what to invest in, as well as when. Time spent acquiring this understanding may pay off by allowing one to trade more intelligently. However, any investor would be wise to proceed with caution in a situation involving potential risk.
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