FOREX - What is it anyway?

I started this blog with the intent of creating a place where I can air my ideas and views - hopefully you will find it entertaining and educational (and also as a way to NOT make the same mistakes I do!) Now having said that...

What is the Forex Market???

Forex stands for "Foreign Exchange" which is the method used by financial institutions and corporate business to exchange funds from one monetary currency to another currency - a means by which to effect a financial transfer of wealth from one currency type to another, if you will. Why would you want to do such a thing? Payment of goods and services across continents tends to be made in the currency of the land. Most local vendors don't accept currency from foreign counties directly (although the Dollar seems to still be universally accepted around the world for the most part).

Of course different currencies have different "values" which depend on the currencies underlying ... well, that may not be so true anymore since most countries no longer have their currency tied to anything of value! But, that is another story entirely!!!

Since the different currencies of the world have different values in relation to one and other there is a potential to make (or lose) vast sums of money by trading the different currencies.

An example would be to buy Euros using Dollars - If a Dollar has an equivalent value of 0.85 Euros then using 10,000 Dollars would give you 8500 Euros. Now - the foreign exchange markets work with much higher values of money for a given transaction (usually in the millions per transaction) but you get the general idea.

So - how do you then make any money just buying and selling the different currencies within the exchange you might ask - since there is a relationship of value between the different currencies you would just be transferring the value back and forth using the valuation ratio to exchange the different currencies with one and other.

Ah Ha!!!

That is the exact point - you are using the ratios of the valuations between the different currencies in order to effect the exchange of one currency to a different currency! Guess what - the ratios change!!! The "change" in the ratio of valuation is caused by several factors, or technicals in Forex Speak, and it is the "change" you are attempting to capitalize on to "create" more value that would translate into profit. That is the basic secret to making money in the foreign currency exchange market!

Going back to the example given above on buying Euros with Dollars - if you had bought the equivelent value of Euros with the 10,000 Dollars and then held the Euros until the ratio changed between the value of the Euro and Dollar you would either gain or lose equivelent value when you sold the Euros back for Dollars. To make money in the Forex market you want to "gain" value for the transactions you perform. So - given the example let's say the ratio of value of the Dollar to the Euro changed from 0.85 to 0.80 (a fairly large change but handy for the example). What this basically says is the 10,000 dollars would only buy 8000 Euros at the current rate, but, you had purchased Euros when the exchange ratio was 0.85 instead of the current 0.80 ratio. By purchasing dollars now with the Euros you had purchased earlier you would now have 10,625 Dollars instead of the original 10,000 you had started with.