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The foreign exchange
market is the largest financial market in
the world, with the equivalent of over
US$2.5 to US$3.2 trillion changing hands
daily; to put this into context, this is
more than three times the aggregate amount
of the US Equity and Treasury markets
combined. Unlike other financial markets,
the Forex market has no physical location
and no central exchange. It operates through
a global network of banks, corporations and
individuals trading one currency for
another. The lack of a physical exchange
enables the Forex market to operate on a
24-hour basis, spanning from one zone to
another in all the major financial centers.
Traditionally, retail investors' only means
of gaining access to the foreign exchange
 market
was through banks that transacted large
amounts of currencies for commercial and
investment purposes. Trading volume has
increased rapidly over time, especially
after exchange rates were allowed to float
freely in 1971. Today, importers and
exporters, international portfolio managers,
multinational corporations, speculators, day
traders, long-term holders and hedge funds
all use the FOREX market to pay for goods
and services, transact in financial assets
or to reduce the risk of currency movements
by hedging their exposure in other markets.
For active traders and investors,
foreign exchange should be no different than
other investment products such as equities,
commodities, bonds, notes, bills, etc.. In
fact because of the globalization of the
economic world and the consolidation of
whole economic regions (i.e., the European
Union), having currencies as part of a
diversified portfolio simply makes sound
portfolio sense.
Just like these other investment
alternatives, foreign exchange offers
traders/investors a market (it is an
over-the counter market) where they can buy
and/or sell an investment product. In this
case it is a specific Currency Pair. The
currency pair may be the Euro versus the US
Dollar, the US Dollar versus the
 Japanese
Yen, the British Pound versus the US Dollar
, the Euro versus British Pound, or a number
of other currency combinations.
The different currency combinations
represent nothing more than the value of one
currency versus the value of another. That
relationship is represented by a single
price.
In foreign exchange, the
price of a currency pair is the markets
expectations (at that time) of the value of
that currency vis-à-vis another currency
given the current and expected economic and
political situation of the two countries. In
equity terms, it is the price of the stock.
If, for example, a country's
inflation/interest rates are low and stable.
If it's economy is strong. If it's politics
are stable and expectations are for more of
the same, then one can expect (in general)
for that country's currency to remain strong
versus a less fundamentally favourable
currency.
Contrasting that with an equity, if the
domestic and global economy is strong. If
inflation is not running away. If
competition is not taking away market share
or eating into margins. If product demand
and growth are strong. If the companies
internal "politics" are such that the
workers are happy and productive, and
expectations are for more of the same, then
you can expect that co mpanies
stock to remain strong versus a company with
less favourable fundamentals.
Like equities there are
other factors that determine the short term
value of a product including technical
analysis, short term supply and demand,
seasonal capital flow patterns, the current
price of the instrument, etc. It is these
universal dynamics that will move a currency
up or down. By analyzing the pricing
dynamics and combining that with sound money
management discipline like stop loss orders,
the investor can insure greater success in
his foreign exchange trading.
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