The forex market is an over-the-Counter or global market for the trade of foreign currencies. This market determines international exchange rates for each currency. It involves all aspects of purchasing, selling and exchanging various currencies in current or predicted values. The forex market allows the investor to trade both long and short positions. It is considered as a very liquid market due to the ease of conducting transactions.
Forex rates are determined on a number of factors including government policy, macroeconomic data, and supply and demand. The major components of the forex market include U.S. dollar, European Euro, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, Chinese Yuan, and Eurodollar. In addition to these currencies, the other major currencies in the spot market are: the Australian Dollar, Canadian Dollar, Swiss Franc, New Zealand Dollar and Eurodollar. In addition to the above currencies, there are numerous other minor currencies used in the currency market such as the Turkish Lira, Singaporean Dollar, and Indonesian Ringent. Interest rates also play a major role in determining the value of the currency in the forex market.
The U.S. dollar strengthens when the EURUSD drops and vice versa. When this trend continues, the interest rates between the US Dollar and the respective major currencies also go up. In order to gain more from the interest rates, the trader tries to buy the EURUSD and sell the USD denominated in that amount. This results in a profit for the trader. However, when this happens too often, the trader may face the risk of losing the invested amount.
Traders have to watch the currency market closely to determine when to buy and sell. Based on the information provided by the Five Days Price Action, these traders can predict the direction of the trends in the market. These five days represent the period from the closing price to the highest bid price in the Forex trading currencies. The trendline is determined through technical analysis of the chart patterns in the chart.
There are other currency pairs that are considered the short range but are gaining popularity now. They are the CFD, NYMEX, OTCBB, and SPX. Traders need to be well informed about the details of these short-range Forex trades. CFDs or contract for difference trades are generally carried out through futures markets. They follow the basic principle of speculating on the prices of future contracts.
Another short-range Forex technique is the spot market. The CFD contracts are traded through derivatives involving the underlying assets such as bonds, commodities, currencies, financial instruments, and so on. The central banks also participate in the spot market by buying or selling government bonds, bank loans, securities, and the like using the central bank’s balance sheet.
Short range Forex trades are executed through the spot market mechanism. Spot foreign currency exchanges are based on the same principle of trade, which allows traders to speculate and trade on the movements in the exchange rates between two currencies. These rates are quoted at the opening of the market. Traders make a bid or offer price on the currency wanted to exchange and then counter accept the counter offer price. The crux of the idea is that there is no real time interaction between traders; instead it’s all done electronically with the help of computer programs.
In the Forex trading market, the two currencies being exchanged are always the same: the US dollar and the Japanese yen. Any currency conversion is done through the use of the USD symbol when dealing with the Japanese yen. Any change in the value of the Japanese yen is reflected in the same manner in regard to the US dollar. When this type of currency pairing is used, the major pairs of the pairs are usually the most liquid, with the exception of the GBP/USD (cross rate). This is a good example of why it’s important to know the going rates for any currency pairing before you enter the market and invest.