Forex market, Supply or Demand and the value of the currency you want to buy or sell
Do you remember the last time you took your family on vacation to a foreign land and dreamed of sunny beaches and Pina Colada in the sunrise breeze? You got to the airport with a smile on your face and foreign currency in your pockets? You were happy, you were proud and you had just dabbled in the Forex market!
Indeed, given that the Foreign Exchange is in fact the value each currency has compared to the next, and if that foreign destination you go to
Today for example, you would need 1.58290 USD to purchase a single Euro and this is a representation of what the Forex market is really. The value of one currency unit against another and what one has to pay in order to buy or sell it!
When one currency is used to purchase another the term “Pairing” is used. For example EUR/USD at 1.58290 simply means that it takes a whooping one dollar and fifty eight some cents to purchase a Euro. That process can of course be reverse and Euros can be used to purchase dollars as well and right now purchasing Dollars when you have Euros is quite an attractive proposition at USD/EUR at 0.631671.
Whenever the USD is not involved in a “Pairing”, it ceased to referred as pairing, but rather as a “Cross” rate. For example, a Japanese traveler in the market for Euros would be able to acquire said Euros at the rate of 161.178 JPY, or EUR/JPY at 161.178
It’s all about which Forex System!
In the world of Forex market, like in most things really, there are only two different types. The Flexible and the Fixed . A Flexible Forex Market applies when it is the Central Bank who decides how much each currency is worth. This valuation is based on supply and demand and doesn’t require the central bank to buy or sell currencies in order to maintain a stable market price.
When the Central Bank has to compensate for currency market fluctuations changes by buying or selling currencies, we have a Fixed Forex Market System. In this case, the Bank acts as a buffer between currencies.
In the case of a price increase for a particular currency for example, the Central Bank has to sell some of its own currency to compensate for the fluctuation. Conversely, when the market value of the currency decreases then the Bank now has to purchase more of that currency for the same purpose of bringing back the situation to the market valuation of the said currency.
It is very much like a pendulum swinging from one side to another. Ideally, there should be no movement with the market value held in the middle. The Central Bank’s responsibility is then to ensure that the swinging movement is reduced and brought back to the middle by either buying or selling some of its own currency stock.
What about the money though?
Indeed we are taking about insane amounts of money here. So much so that you would need 12 zeros to the right of the number 2 to get a representation of what that market really is, and that would just be for a single day’s trade!
As an “Over The Counter” operation, the Forex Market relies on a computer network and as opposed to the more traditional brick and mortar institution. It is open to traders 24 hours a day and is uniquely suited for both the cooperate trader and the at home trader.
Forex Traders or FX Traders as they are also known are in the business of buying and selling currencies from each other. The results of these transactions are then fed into these networked computers in order to be displayed on official quote screens.
Warning!
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