What is Forex

For active traders and investors, the Forex (foreign exchange) should be no different than other investment products, such as equities, commodities, or fixed-income. Because of globalization in the economic world and consolidation of whole economic regions (i.e., the European Union), including currencies in a portfolio helps to diversify assets and can reduce risk.

Just like other investment alternatives, Forex offers traders/investors a market where they can buy 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 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 market's expectations (at that time) of the value of that currency measured against another currency, given the current and expected economic and political situation in the two economies. In equity terms, it is similar to the price of the stock.

If, for example, an economy's inflation/interest rates are low and stable, its output is growing strongly, or if its politics are stable, then one can expect for that country's currency to remain strong versus a less fundamentally favorable currency.

Contrasting that with an equity, if the domestic and global economy is strong, inflation is not rampant, competition is not taking away market share or eating into margins, product demand and growth are strong, or if the companies internal "politics" are such that the workers are happy and productive, then you can expect that company's stock to remain strong versus a company with less favorable fundamentals.

Similar to equities, there are other factors that determine the short-term value of a forex currency pair, 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's value up or down.

*Foreign Exchange trading involves substantial risk of loss and is not suitable for all investors. ThinkForex.com is compensated through the bid/ask spread. The Foreign Exchange market carries a high level of risk and is not suitable for all investors.