Forex: How Does Currency Exchange Work

I Only Have US Dollars How Can I Sell Euros?

Trading in the Forex Market can be very profitable if you have knowledge and experience. A small bit of knowledge can quickly move the profitability odds in your favor. You may not get rich, but you won’t lose your money. And with time you will become a successful trader.

A good foundation is the best way to build, like a skyscraper, without a good foundation, the building will eventually collapse.

To trade and make money in Forex, you need to understand what the markets are all about.

Currency trading is fairly simple to understand. There are two primary reasons why the value of a currency moves. The first is because of a “real” market, which is based on supply and demand.

For example, as outside investors or visitors wish to buy things within another country, they are forced to convert their domestic currency into the currency of the country in which they are buying. Similarly, as money leaves the country, people must sell their currency for the foreign currency they will need to spend or invest abroad. Exchanging currencies drives supply and demand, which causes currency value to increase or decrease. This is a very basic explanation, until there was an acceptable trading and clearing system, this was the how the markets moved. Many years ago, the markets worked based on the gold standard and all currencies were either gold (coins) or backed by gold.

Now the markets are traded through a global exchange where values are attached to currency based on demand, which today, has very little to do with visitors exchanging money to make purchases, a great deal of currency flows through central banks The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations that need to trade currencies continually (for example, for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity). However, these day-to-day corporate needs comprise only about 20% of the market volume.

80% of trades in the currency market are speculative in nature, based on economic and technical data in the hopes that the demand of that currency will increase or decrease, this is known as selling short or buying long. Central Banks no long move currency between countries, it is all done via computers and investors never take control of these funds, they are tracked by the global exchanges and by brokers.

Currency on the open markets is not bought and sold as you were in an Exchange at the Airport, but they are a miniature version of a global exchange. They have a value assigned to each currency and when you arrive at the airport with your USD you can sell them to get Euros and upon your return home you can sell your Euros at the Airport to get USD. Unfortunately, at the stand at the airport, you lose a lot per transaction because they have to cover their overheads and make profit on your transaction. That is why global exchanges and brokers do not deal in small quantities of currency.

The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price. For dollar denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader’s account. put on by large financial institutions, multibillion dollar hedge funds and even individuals who want to express their opinions on the economic and geopolitical events of the day.

Because currencies always trade in pairs, when a trader makes a trade he or she is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, she would, in essence, have exchanged Euros for dollars and would now be “short” Euros and “long” dollars. To better understand this dynamic, let’s use a concrete example. If you went into an electronics store and purchased a computer for $1,000, what would you be doing? You would be exchanging your dollars for a computer. You would basically be “short” $1,000 and “long” one computer. The store would be “long” $1,000 but now “short” one computer in its inventory. The exact same principle applies to the FX market, except that no physical exchange takes place. While all transactions are simply computer entries, the consequences are no less real. This is how you sell Euros when you only have Dollars.