Foreign Exchange

how it works

Friday, October 20, 2006 2:18 PM mistrack

Foreign exchange is the simultaneous buying of one currency and selling of another. the world's currencies are on a floating exchange rate and are always traded in pairs, for example euro/dollar or dollar/yen. in trading parlence, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. A short position is one in which the trader sells a currency in anticipation that it will depreciate. in every open position, an investors is long in one currency and shorts the other. FX traders express a position in terms of the first currency in the pair. for example, someone who has bought dollars and sold yen (usd/jpy) at 104.37 is considered to be long us dollars and short yen.
the most often traded or "liquid" currencies are those of countries with stable governments, respected central banks, and low inflation. today, over 85% of all daily transactions involve trading of the major currencies, including the us dollar, japanese yen, euro, british pound, swiss franc, canadian dollar and australian dollar. the FX markets is considered an over the counter (OTC) or 'interbank' market, due to the fact that transaction are conducted between two counterparts over the telephone or via an electronic network. trading is not centralized on an exchange, as with the stock and futures markets. A true 24 hour market, forex trading begins each day in sydney, and moves around the globes as the bussinies day begins in each financial center, first to tokyo, london, and new york. unlike any other financial market, investors can respond to currency fluctations caused by economics, social and political events at the time the occur day or night.

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