Forex / FX is a commonly used abbreviation for “foreign exchange”. It typically describes trading in the foreign exchange market, especially by investors and speculators. “Buy Low and Sell High” means a forex trader purchases currencies that are undervalued and sells currencies that are overvalued; just as stock trader purchases stock that is undervalued and sells stock that is overvalued.
This is similar to stock trading. Stock traders buy a stock if they its price will rise, and vice versa. Forex traders employ this same pattern- to buy a currency pair if its exchange rate will rise and to sell a currency pair if its exchange rate will fall.
Exchange rate is the relative value of different currencies which are determined by a decentralized foreign exchange marketplace. Unlike other markets, there is no centralized depository or exchange where transactions are conducted. Instead, these transactions are conducted by several market participants in several locations. It is rare that any two currencies will be identical to one another in value, and it’s also rare that any two currencies will maintain the same relative value for more than a short period of time. In forex, the exchange rate between two currencies constantly changes.
EUR/USD Exchange Rate
A currency’s value fluctuates as its supply and demand fluctuates.
- An increase in supply or a decrease in demand for a currency can cause the value of that currency to fall.
- A decrease in the supply or an increase in demand for a currency can cause the value of that currency to rise.
A big benefit to forex trading is that you can buy or sell any currency pair, at any time subject to available liquidity. So if you think the Eurozone is going to break apart, you can sell the euro and buy the dollar (sell EUR/USD). If you think the price of gold is going to go up, based on historical correlation patterns you can buy the Australian dollar and sell the U.S. dollar (buy AUD/USD).
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