I left off in the last article explaining to you what forex means the exchange of foreign currencies across many markets. I explained that foreign currencies have what is called a free exchange rate, meaning their exchange value is not fixed and can fluctuate from market to market. In this article I am going to continue to explain some of the finer points of forex trading so you can be convinced that this is a viable investment you definitely want to jump on.
Just how big is the market?
You may not want to join the forex market because you believe it is not big enough to survive a downturn. Well you need to understand that the forex trading market is the biggest financial market in the world. There is over 1.9 trillion dollars in US currency traded everyday over this market. Do you have any idea how much money that is? Whatever you invested would not even make a dent, even if it were several millions of dollars.
I also explained to you the different kinds of currencies that are traded in the market. To help you get an understanding of how this business works I’ll use a baseball example. In Baseball you have your major leagues and you have you minor leagues right? Well in the forex trading market they have a similar system, though it is not written in stone. Certain currencies are referred to as the major currencies, while others currencies are referred to as the minor currencies. This is because the major currencies are those that make up over 85% of the market. The minor currencies make up the other 15% so they are obviously not as profitable.
Is there a way to simplify this?
Like I said before, you don’t have to be intimidated or anything. There is a way to simply how the forex trading market works. Picture that all currencies, the major and the minors, all revolving around one central sun. Well that sun would be the US dollar. Every transaction is made with the US dollars as its nucleus.
Picture it this way; if the US dollar goes down in value then this is an indicator that someone else’s currency value has gone up, because now your US dollar would buy you less of the other currency. If the value of the US dollar goes up then your dollar would buy you more of another currency. See how that works?
Please pick a pair
I told you that the US dollar is used as the focal point to help determine the value of other major currencies. But to help you understand more I am going to tell you exactly how it works. Remember when you were a kid and you used to trade things like baseball cards? You did this because you felt you were getting a steal, you though one was more valuable to you then the other.
Currencies are traded in the same way. You have to buy them in pairs; this means that whenever you buy one currency that you have to buy it against another, like US dollar against the European euro, or the Japanese yen against the Canadian dollar. Thorough research has to be done to help you determine if this is a move that will prove profitable in the long run.
Stay with me and you’ll soon be more excited about the possibilities. Depending on what kind of person you are you’ll be able to do the proper research to determine if buying one currency pair against another is a smart move or not. Once you understand how it works you’ll see why your returns can be so much better then any other form of investment. I’ll explain more in part three to this article.